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ELEMENTS OF ECONOMICS 



ELEMENTS 
OF ECONOMICS 




ArC^FRADENBURGH 

If 
PROFESSOR OF HISTORY AND POLITICS, ADELPHI COLLEGE 

AND PROFESSOR OF ECONOMICS IN BROOKLYN BRANCH, COLLEGE OF 
CITY OF NEW YORK 



CHARLES SCRIBNER'S SONS 

NEW YORK BOSTON CHICAGO 






Copyright, 1921, by 
CHARLES SCRIBNER'S SONS 



OCT -h m\ 



THe SCRIBNER PRESS 

A 



©CLA624712 



.^.^ y* 



PREFACE 

This book is designed to be an introduction to the science 
of economics. Technical discussions and difficult termi- 
nology have been avoided. The author has endeavored 
to write a book of practical value to the student, but is 
convinced that any practical work must be founded upon 
sound theory. 

There are many economic questions upon which there 
may be dififerences of opinion. Both sides of most dis- 
puted questions are given. Students should be encour- 
aged to draw their own conclusions after weighing the 
evidence. 

While the experience of most teachers of economics has 
convinced them that one book should be followed as a 
guide, students should read references in other works. 
Fortunately there are many excellent books — ^perhaps 
too difficult in parts for the beginner — containing many 
chapters that can be read with profit by even an imma- 
ture student. Among many works suitable for reference 
purposes the following are especially recommended: Bul- 
loch, Introduction to the Study of Economics ; Carver, Prin- 
ciples of Political Economy ; Ely, Outlines of Economics ; 
Fetter, Principles of Economics ; Seager, Introduction to 
Economics ; and Turner, Introduction to Economics. 

Grateful acknowledgment is made to the publishers and 
authors of copyrighted books for permission to use selec- 
tions. The Macmillan Company has given permission to 



vi PREFACE 

print certain quotations from Ely's Outlines of Economics, 
Spargo's Socialism, Taussig's Principles of Economics, and 
Plehn's Introduction to Public Finance. 

Prentice-Hall, incorporated, has authorized the use of 
selections from Gerstenberg's Economics of Business, and 
Ettinger and Golieb's Credits and Collections. Harcourt, 
Brace & Co. have granted permission to use selections 
from David Friday's Profits, Wages and Prices. 

Ginn & Company have given permission to quote a se- 
lection from Commons's Trade Unionism and Labor Prob- 
lems. 

The selections from Wolfe's Practical Banking are used 
with the permission of the La Salle Extension University 
of Chicago, Illinois. 

To Richard T. Ely, the author is indebted for the use of 
a selection from Problems of Today, a work which is now 
unfortunately out of print. 

To Professor E. E. Proper, of the Bay Ridge High 
School, Brooklyn, and to Miss Amanda Edson, of Emerson 
Hall, Brooklyn, the author is indebted for helpful sugges- 
tions. Grateful acknowledgment is made to Mr. H. K. 
Twitchell, President of the Chemical National Bank of 
New York, and Mr. G. Foster Smith, President of the 
Nassau National Bank .of Brooklyn, for assistance in the 
chapters on credit and banking. 

A. G. Fradenburgh. 

Brooklyn, New York, 
July 15, 192 1. 



CONTENTS 

CHAPTER I 

THE NATURE OF ECONOMICS 

PAGE 

THE SOCIAL POINT OF VIEW — ECONOMIC DEPENDENCE UPON 
OTHERS — THE ORGANIC NATURE OF SOCIETY — THE SUBJECT- 
MATTER OF ECONOMICS — ECONOMICS AND OTHER SCIENCES 
— THE DIVISIONS OF ECONOMICS — ECONOMIC MOTIVES — SUM- 
MARY I 

CHAPTER II 

SOME CHARACTERISTICS OF MODERN ECONOMIC SOCIETY 

PRIVATE PROPERTY — ^PRIVATE ENTERPRISE — INHERITANCE 
— VESTED RIGHTS — DIVISION OF LABOR AND EXCHANGE — 
FREEDOM OF LABOR — FREEDOM OF CAPITAL — RESTRIC- 
TIONS ON FREEDOM OF LABOR AND CAPITAL — COMPETITION 
— MONOPOLY— CUSTOM — SUMMARY lO 

CHAPTER III 

WANTS AND THEIR SATISFACTION 

ELEMENTARY WANTS — CULTURAL WANTS — ADVERTISING 
CREATES WANTS — GOODS — FREE GOODS AND ECONOMIC 
GOODS — THE CONSUMPTION OF GOODS — PRESENT AND FU- 
TURE GOODS — USEFUL AND HARMFUL CONSUMPTION — 
PUBLIC WEALTH — SUMMARY 1 9 

CHAPTER IV 

CONSUMPTION OF WEALTH FURTHER CONSIDERED 

THE LAW OF SATIETY — THE LAW OF DIMINISHING UTILITY — 
THE LAW OF VARIETY — THE ECONOMIC ORDER OF CON- 
SUMPTION — consumer's goods AND PRODUCER'S GOODS — 
NECESSARIES — COMFORTS — LUXURIES — LUXURIES DO NOT 

vii 



viii CONTENTS 

PAGE 

INCREASE DEMAND FOR LABOR FAMILY BUDGETS — ENGEL's 

LAW — SOME RECENT FAMILY BUDGETS — MINIMUM-WAGE 
LAWS — SUMMARY 24 

CHAPTER V 

THE PRODUCTION OF WEALTH 

NATURE OF PRODUCTION — PERSONAL SERVICES — NON-PRO- 
DUCERS — FACTORS IN THE PRODUCTION OF WEALTH — NA- 
TURE — LAND AS PROPERTY — THE INFLUENCE OF THE LAND 
UPON THE PEOPLE — INCREASE IN LAND — THE INFLUENCE 
OF THE CONSUMER UPON PRODUCTION — THRIFT VERSUS 
EXTRAVAGANCE — SUMMARY 39 

CHAPTER VI 

LABOR AND POPULATION 

TEMPORARY LOWERING OF EFFICIENCY OF LABOR — DIVISION 
OF OCCUPATION AND DIVISION OF LABOR — ADVANTAGES OF 
THE DIVISION OF LABOR — DISADVANTAGES — THE GEO- 
GRAPHICAL DIVISION OF OCCUPATION — CAUSES FOR GEO- 
GRAPHICAL DIVISION OF OCCUPATION — INCREASE IN POP- 
ULATION — NATURAL GROWTH OF POPULATION — THE MAL- 
THUSIAN THEORY OF POPULATION — IMMIGRATION — AMER- 
ICANIZATION^SUMMARY 50 

CHAPTER VII 

THE NATURE AND USE OF CAPITAL 

CAPITAL AND CAPITAL GOODS — FIXED AND CIRCULATING 
CAPITAL — FREE AND SPECIALIZED CAPITAL — PUBLIC AND 
PRIVATE CAPITAL — THE ROUNDABOUT PROCESS OF PRODUC- 
TION — CAPITAL FORMATION — REPLACEMENT FUNDS — SUM- 
MARY 66 

CHAPTER VIII 

MARKETS, VALUE, AND PRICE 

DEMAND AND SUPPLY — ELASTIC AND INELASTIC DEMAND — 
THE LAW OF SUBSTITUTION — SUBJECTIVE VALUE — MARKET 



CONTENTS ix 

PAGE 

VALUE WHEN THERE ARE MANY PURCHASERS AND ONE 
SELLER — MARKET VALUE WHEN THERE ARE MANY SELLERS 
AND ONE BUYER — MARKET VALUE WHEN THERE ARE MANY 
BUYERS AND MANY SELLERS — COMPETITION NOT ALWAYS 
PERFECT — MARKET VALUE OF COMPLEMENTARY GOODS — 
THE MARKET VALUE OF FUTURE GOODS — THE RELATION 
OF COST OF PRODUCTION TO VALUE — THE MARGINAL PRO- 
DUCER — THE EXAMPLE OF OIL WELLS A COMPLICATED ONE 
— RESTATEMENT OF THE LAW OF VALUE — SUMMARY . . 72 

CHAPTER IX 

THE ORGANIZATION OF INDUSTRY 

THE ENTREPRENEUR — INDIVIDUAL PROPRIETORSHIP — PART- 
NERSHIPS — LIMITED PARTNERSHIPS — CORPORATIONS — 
STOCKS AND BONDS — PROFIT-SHARING — WELFARE WORK — 
CO-OPERATION AS A METHOD OF PRODUCTION — INDUSTRIAL 
DEMOCRACY — THE RELATION OF THE STATE TO INDUSTRY — 
SUMMARY 86 



CHAPTER X 

THE PRINCIPAL AMERICAN INDUSTRIES — HUNTING, 
FISHING, MINING, AND LUMBERING 

CLASSIFICATION OF ECONOMIC INDUSTRIES — EXTRACTIVE 
AND GENETIC INDUSTRIES — HUNTING — FISHING — MINING — 
LUMBERING— TIMBER DEPLETION AND PRICES — SUMMARY lOI 



CHAPTER XI 

THE PRINCIPAL INDUSTRIES OF THE UNITED STATES — 
STOCK-RAISING AND AGRICULTURE 

STOCK-RAISING AGRICULTURE INTENSIVE AND EXTENSIVE 

CULTIVATION — THE LAW OF DIMINISHING RETURNS IN 
AGRICULTURE — THE MARGINAL PRODUCT OF LABOR AND 
CAPITAL — SCIENTIFIC AGRICULTURE — URBAN AND COUNTRY 
POPULATION — DECLINE IN RURAL POPULATION — SIZE OF 
FARMS — MARKETING OF FARM PRODUCTS — SUMMARY . . II9 



X CONTENTS 

CHAPTER XII 

PAGE 

MANUFACTURING 

THE INDUSTRIAL REVOLUTION — THE FACTORY SYSTEM — THE 
EXTENSION OF THE FACTORY SYSTEM TO AMERICA — THE 
FACTORY SYSTEM STILL BEING EXTENDED — TENDENCY TO- 
WARD PRODUCTION ON A LARGE SCALE — ADVANTAGES OF 
THE SMALL PRODUCER — MACHINERY AND LABOR — THE LAW 
OF DIMINISHING RETURNS IN MANUFACTURING — SUMMARY 137 

CHAPTER XIII 

TRANSPORTATION 

THE TURNPIKE PERIOD — THE REVIVAL OF LONG-DISTANCE 
ROADS — CANAL-BUILDING — RAILROADS — RAILROAD COMPE- 
TITION^RAILROAD ABUSES— PUBLIC REGULATION OF RAIL- 
ROADS — THE RAILROADS AND THE GREAT WAR — WATER 
TRANSPORTATION — THE MERCHANT MARINE ACT OF I920 — 
TRADE ON THE GREAT LAKES — SUMMARY 1 46 

CHAPTER XIV 

MERCHANDIZING 

TRADE PRODUCES UTILITY — IMPORTANCE OF MERCHANDIZ- 
ING — STORAGE — THE HIGH COST OF SELLING — SALESMAN- 
SHIP — ADVERTISING — THE PRINCIPLE OF " CAVEAT EMP- 
TOR" — SUMMARY . 161 

CHAPTER XV 

INSURANCE 

WHAT IS INSURANCE ? — FIRE INSURANCE — THE CONTRACT — 
PREVENTION OF FIRE — LLOYDS — LIFE INSURANCE — THE 
LIFE-INSURANCE POLICY — DIVIDENDS — THE SCIENTIFIC 
BASIS OF LIFE INSURANCE — STATE SUPERVISION OF IN- 
SURANCE — OLD AGE INSURANCE — ACCIDENT INSURANCE 

INSURANCE AGAINST SICKNESS — THE USUAL OBJECTIONS 

TO STATE INSURANCE OF WORKING MEN — GROUP INSUR- 
ANCE — SUMMARY -.170 



CONTENTS xi 

CHAPTER XVI 

PAGE 

MONEY 

WHAT IS MONEY? — WHAT MONEY DOES — MONEY AS A ME- 
DIUM OF EXCHANGE — MONEY AS A MEASURE OF VALUE — 
MONEY AS A STANDARD FOR DEFERRED PAYMENTS — QUALI- 
TIES NECESSARY FOR GOOD METALLIC MONEY — COINAGE — 
SEIGNIORAGE AND BRASSAGE — FREE COINAGE — GRESHAM'S 
LAW — BIMETALLISM IN THE UNITED STATES — INTERNA- 
TIONAL BIMETALLISM — SUMMARY l8o 

CHAPTER XVn 

PAPER MONEY 

VARIETIES OF PAPER MONEY — REDEEMABLE PAPER MONEY — 
IRREDEEMABLE PAPER MONEY — FIAT MONEY — BANK-NOTES 
— THE NATIONAL BANKING SYSTEM — ELASTIC CURRENCY — 
THE FEDERAL RESERVE SYSTEM — ISSUES OF CURRENCY BY 
FEDERAL RESERVE BANKS — MONEY IN CIRCULATION IN 
THE UNITED STATES — SUMMARY 19O 

CHAPTER XVIII 

MONEY AND PRICES 

THE QUANTITY THEORY OF PRICES — EFFECTS OF CHANGES 
IN THE VOLUME OF CURRENCY — THE MULTIPLE STANDARD 
— INFLATION AND CONTRACTION — INDEX NUMBERS — THE 
STABILIZED DOLLAR — SUMMARY 200 

CHAPTER XIX 

BANKING AND CREDIT 

THE BANKING FUNCTIONS — THE DEPOSIT FUNCTION — 
LOANS AND DISCOUNTS — BANK RESERVES^KINDS OF BANKS 
— WHAT IS CREDIT? — PROMISSORY NOTES — BOOK- AC- 
COUNTS — ACCEPTANCES — BONDS — CHECKS — CERTIFIED 
CHECKS — THE CLEARING-HOUSE SYSTEM — BILLS OF EX- 
CHANGE AND DRAFTS — THE USE AND ABUSE OF CREDIT — 
SUMMARY 206 



xii CONTENTS 

CHAPTER XX 

PAGE 

INDUSTRIAL DEPRESSIONS AND CRISES 

TRUE EXPLANATION OF REGULAR OCCURRENCE OF CRISES — 
OVER-PRODUCTION AND CRISES — CROP FAILURES AND 
CRISES — THE RELATION OF MIDDLEMEN TO CRISES — THE 
BANKS AND CRISES — SUMMARY 220 

CHAPTER XXI 

INTERNATIONAL TRADE 

NATURE OF INTERNATIONAL TRADE — THE FOREIGN TRADE 
OF THE UNITED STATES — BALANCE OF TRADE — PAYMENT 
OF INTERNATIONAL OBLIGATIONS — THE EDGE ACT AND THE 
WEBB-POMERENE ACT — SUMMARY 227 

CHAPTER XXII 

RESTRICTIONS ON INTERNATIONAL TRADE 

TARIFFS — THE INFANT-INDUSTRIES ARGUMENT — THE HOME- 
JMARKET ARGUMENT — THE WAR ARGUMENT — THE TARIFF 
AND WAGES — THE ANTI-DUMPING ARGUMENT — A PROTEC- 
TIVE TARIFF INVITES RETALIATORY TARIFFS — THE PROTEC- 
TIVE TARIFF AND MONOPOLIES — WHO PAYS THE TARIFF? — 
PROTECTION SELDOM INCREASES THE TOTAL INDUSTRIES 
OF A COUNTRY — CONCLUSION — SUMMARY 237, 

CHAPTER XXIII 

MONOPOLIES 

DEFINITION OF MONOPOLY — MONOPOLY PRICES — CLASSIFI- 
CATION OF MONOPOLIES — PERSONAL MONOPOLIES — PRI- 
VATE LEGAL MONOPOLIES — PATENTS — COPYRIGHTS — PUB- 
LIC LEGAL MONOPOLIES — NATURAL MONOPOLIES — NATURAL 
MONOPOLIES OF LOCATION^ — NATURAL MONOPOLIES BY 
NATURE OF THE BUSINESS — THE WATER MONOPOLY — GAS 
AND ELECTRIC SERVICE — THE TELEPHONE BUSINESS — 
STREET RAILROADS — PUBLIC VERSUS PRIVATE OWNERSHIP 
OF NATURAL MONOPOLIES — PUBLIC CONTROL OF NATURAL 
MONOPOLIES — LIMITS TO REGULATION OF PRICES — RAIL- 
ROAD MONOPOLIES — THE TRANSPORTATION ACT OF 1920 — 
GOVERNMENT CONTROL OF RAILROADS — TRUSTS, OR CAPI- 



CONTENTS xiii 

PAGE 

TALISTIC MONOPOLIES — WHAT IS A TRUST? — ANTI-TRUST 
LAWS — SUMMARY 246 

CHAPTER XXIV 

RENT 

DEFINITION or RENT — LAND ON THE MARGIN OF CULTIVA- 
TION — IS THERE "no-rent LAND " ? — RENTS OF AGRICUL- 
TURAL LANDS DO NOT AFFECT PRICES — DO AGRICULTURAL 
RENTS ALWAYS RISE? — URBAN RENTS — CHANGES IN 
URBAN RENTS — SUMMARY 263 

CHAPTER XXV 

WAGES 

LIMITS OF WAGES — REAL AND NOMINAL WAGES — THE DE- 
MAND AND SUPPLY OF LABOR — TIME WAGES — PIECE WAGES 
— RATE-OF-SERVICE WAGES — NON-COMPETITIVE GROUPS — 
ADAM smith's REASONS FOR DIFFERENCES IN WAGES — 
SUMMARY 272 

CHAPTER XXVI 

LABOR PROBLEMS 

THE OPEN VERSUS THE CLOSED SHOP — STRIKES — SYMPA- 
THETIC STRIKES — GENERAL STRIKES — LOCKOUTS — ARBITRA- 
TION — BOYCOTTS — CHILD-LABOR LAWS — WOMEN WAGE- 
EARNERS — THE EIGHT-HOUR DAY — SUMMARY . . . 279 

CHAPTER XXVII 

LABOR ORGANIZATIONS 

THE SERVICES OF LABOR ORGANIZATIONS — THE RISE OF 
LABOR ORGANIZATIONS IN THE UNITED STATES — THE 
AMERICAN FEDERATION OF LABOR — THE INDUSTRIAL WORK- 
ERS OF THE WORLD — THE LOYAL LEGION OF LOGGERS AND 
LUMBERMEN SUMMARY 29 L 

CHAPTER XXVIII 

INTEREST 

WHY INTEREST IS PAID — INTEREST AS A REWARD FOR WAIT- 
ING — PURE AND GROSS INTEREST — THE RATE OF INTEREST — 
LONG AND SHORT TIME LOANS — USURY LAWS — INTEREST NOT 
THE ONLY INDUCEMENT TO SAVING — SUMMARY . . . 3OO 



xiv CONTENTS 

CHAPTER XXIX 

PAGE 

PROFITS 

NATURE OF PROFITS — THE ENTREPRENEUR AS A RISK TAKER 
— THE NATURE OF BUSINESS RISKS — CLASSES OF ENTRE- 
PRENEURS — DIFFERENTIAL PROFITS — EXTRAORDINARY 
PROFITS — WAR PROFITS — SUMMARY . 306 

CHAPTER XXX 

SOME PROPOSED RADICAL ECONOMIC CHANGES 

THE SINGLE TAX — ARGUMENTS AGAINST THE SINGLE TAX — 

ANARCHISM COMMUNISM SOCIALISM ARGUMENTS FOR 

SOCIALISM EXAMINED — SUMMARY 313 

CHAPTER XXXI 

PUBLIC FINANCE 

PUBLIC AND PRIVATE FINANCE COMPARED — THE BUDGET — 
GROWTH IN PUBLIC EXPENSES — PUBLIC REVENUE — ADAM 
smith's CANONS OF TAXATION — DIRECT AND INDIRECT 
TAXATION — TAXES ON IMPORTS — EXCISE TAXES — INCOME 

TAXES — INHERITANCE TAXES — TAXES ON REAL ESTATE 

TAXES ON PERSONAL PROPERTY — A PROGRAM OF TAXA- 
TION — EXEMPTIONS FROM TAXATION — TAXES ON SALES — 
PUBLIC DEBTS — THE LIBERTY AND VICTORY LOANS — SUM- 
MARY 325 

CHAPTER XXXII 

SOCIAL AND ECONOMIC BETTERMENT 

RECENT SOCIAL AND ECONOMIC PROGRESS — METHODS OF 
ECONOMIC PROGRESS — INCREASED PRODUCTION SHOULD 
BENEFIT ALL 345 

APPENDICES 

APPENDIX I — INDUSTRIAL REPRESENTATION PLAN OF THE 
FACTORY OF THE GOODYEAR TIRE AND RUBBER COM- 
PANY, AKRON, OHIO 351 

APPENDIX II — AMERICANIZATION — WHAT IS IT ? . . 356 

INDEX 359 



ILLUSTRATIONS 

PAGE 

Chicago water front 43 

Desert land made fertile by irrigatian 45 

Skilled workmen in a Chicago packing-house 53 

A stock certificate . . gi 

Coal production of the United States 105 

Production of iron ore in the United States . , . . . . 106 

Bakersfield oil region in California 109 

Timber depletion no 

A ''skidder machine" . . . m 

Destruction by forest-fire 115 

Corn production of the United States 121 

Wheat production of the United States . . . . . . , 122 

Unloading cotton 123 

Cotton production of the United States ...... 124 

Machinery in use on a Western farm 125 

Farm lands in New England and Montana . . . . . 129 

Scene in a Detroit automobile factory 143 

Mitchell Point on the Columbia River highway . . . 147 

Barges on the Mississippi River 151 

XV 



xvi ILLUSTRATIONS 



PAGE 



An ocean liner and an express-train 155 

The "curb" market on Broad Street, New York .... 165 

A promissory note secured by collateral 208 

A promissory note and draft 211 

A trade acceptance 213 

A bank acceptance 214 

A certified check 215 

A foreign bill of exchange . 231 

A commercial letter of credit . . . 233 

Map illustrating rent 265 

A city apartment-house and a suburban house .... 267 

Cartoon illustrating war expenses 339 

Selling liberty bonds in New York 341 



ELEMENTS OF ECONOMICS 



THE ELEMENTS OF ECONOMICS 

CHAPTER I 
THE NATURE OF ECONOMICS 

Economics treats of man in his relation to wealth. It 
tells how men make a living and how they may make a 
better living. It is concerned with the production of 
wealth, how wealth is divided among the various members 
of the community, and how wealth is used. It has also 
to do with plans for a larger production of goods, a more 
equitable distribution, and a more rational and more eco- 
nomic consumption. 

Not many years ago the subject was called Political 
Economy. Some authors still prefer this title, but Eco- 
nomics is the more appropriate term, inasmuch as many 
subjects discussed in economics are not at all political. 

The Social Point of View. — Most people consider their 
own economic well-being as of first importance. This 
is natural. The economist, however, looks at all things 
from the social point of view, that is, 'Hhe greatest good 
to the greatest number." The individual economic inter- 
est is often opposed to the social interest. For example, 
a few years ago the Louisiana State Lottery was a profitable 
enterprise for a small group of men. Its operations were 
opposed to the economic interests of a majority of the 



2 THE ELEMENTS OF ECONOMICS 

people of Louisiana and of the nation and to the moral 
interests of all. The State of Louisiana, in refusing to per- 
mit the company to continue in business, rendered an eco- 
nomic as well as a social service. Then, again, the owners 
of a cotton-mill might benefit by employing child labor, 
but the public would not benefit. 

Economic Dependence upon Others. — In earlier times 
every family was, to a large extent, independent of every 
other family. It produced its own food, made its own 
clothing, and lived in its own house supplied with water 
from its own well and lighted with candles made from the 
tallow of its own sheep. Such was the condition in America 
during colonial times. 

Now all is changed. No one is economically indepen- 
dent. Each of us renders some service or produces some 
commodity for others and receives payment in money with 
which to purchase the goods we need. Recently a popular 
magazine showed, even for a simple meal, our dependence 
upon others: 

^'The pepper came from ten thousand miles away. It 
grew on a little bush about eight feet high, which must 
have had a growth of at least five years. The pepper was 
picked green, it had to be dried in the sun, and this meant 
employing women. It took one ship and a thousand miles 
of railroad to bring the pepper to the United States. The 
tea on the table came from China and the coffee from 
South America. The codfish had to be brought from 
Maine. Men had to be employed to catch the fish; other 
men and women were employed in drying, packing, and 
boxing it, and it, too, had to make a long railroad journey. 
The flour of which the bread was made was grown in 



THE NATURE OF ECONOMICS 3 

Dakota; some one owned the land, and that meant the 
investmg of capital; and then he had also to pay wages 
to working men. The wheat had to be ground, and the 
building of the mill and the plant, or machinery, meant 
more money invested. The millers had to be paid; coopers 
had to be paid for making the barrels; and, of course, the 
wood of which the barrels were made had to be cut and 
sawed and shaped, and this meant the employing of more 
men. Then the flour had to be shipped over the railroad 
and handled again by cartmen before it came into the 
house. The salt came from the Indian Reservation in 
the northwestern part of New York State. The canned 
peaches came from California, and they too represented 
the employment of capital and labor. The spices in the 
cake came from the Spice Islands in the Indian Archi- 
pelago." 

The only items on the table which could be produced 
within the county where the meal was eaten were corn 
bread, butter, and buttermilk. It is estimated that the 
little meal represented directly or indirectly the employ- 
ment of five hundred millions of dollars of capital and of 
five millions of men. 

The Organic Nature of Society. — Our dependence upon 
others has caused society, which includes all of us, to be 
regarded as an organism, just as the human body is an 
organism. Some parts of this social organism do one thing 
and some another. The services of each part are necessary 
to the welfare of the whole. Suppose, for example, the 
railroads fail to bring us food and fuel. Then the whole 
social organism suffers. Just as the human body cannot 
do its work if the nervous system is out of order, so 



4 THE ELEMENTS OF ECONOMICS 

society depends upon its nervous system — the telegraph 
and telephone lines. We are truly our brother's keep- 
ers. 

The Subject-Matter of Economics. — Economics deals 
with subjects in which every one is interested. Such sub- 
jects as the protective tariff, public ownership of railroads, 
money and banking, stocks and bonds, labor problems, and 
monopolies are of concern to each of us. The main object 
in the study of economics is to teach us to think correctly 
on economic questions. 

Economics and Other Sciences. — ^Every science is in 
some way related to economics. For example, arithmetic 
is used in the conduct of the smallest business. The higher 
mathematics are employed by surveyors, architects, me- 
chanical and electrical engineers. Statistics form the scien- 
tific basis of the life-insurance business and are used by 
business men in calculating costs and determining the re- 
sults of advertising campaigns. Chemistry and physics 
must be known by the scientific farmer as well as by those 
who engage in manufacturing. Among the social sciences 
sociology and history are most closely related to economics. 
Sociology is the science which treats of man in his relations 
with his fellow men. Economics may be considered as 
that branch of sociology which has to do with how men 
make a living. History is of such importance to economics 
that every historian must be something of an economist 
and every economist must be well versed in history. The 
English historian Freeman once said that ''History is past 
politics and politics is present history." Many modern 
historians would also say that history is past economics 
and economics is present history. 



THE NATURE OF ECONOMICS 5 

The Divisions of Economics. — Economics may be re- 
garded as consisting of three sections: (i) Consumption 
of wealth, (2) production of wealth, (3) distribution of 
wealth. 

1. The consumption of wealth deals with the use or 
using up of goods. Some goods, like edibles, are used in 
one process and are known as perishable goods. Others, 
like a house, may be used for many years and are known as 
durable goods. 

2. Production has to do with making things ready for 
use. Nature furnishes raw material, but man must gather 
it and prepare it. The relation between production and 
consumption of wealth is close. Goods are produced in 
order that they may be consumed. Demand results in 
goods being supplied. But a supply sometimes creates a 
demand. The desire for a means of flying led to the in- 
vention of the airplane, but the production of airplanes 
produced a demand for them among persons who had never 
before considered the possibility of flying. 

3. Distribution deals with the incomes which the 
various members of society receive. Rent, wages, interest, 
and profits are the subjects discussed in considering the 
distribution of wealth. Most of the great economic ques- 
tions of to-day refer to distribution. For example, the 
interests of labor and capital are identical in the production 
of wealth. Both are interested in a large production, for 
the more produced the more there will be to divide; but 
when it comes to distribution their interests often seem to 
clash. The capitalist thinks the laborer wants more than 
his just share, and the laborer thinks the capitalist is the 
offender, and often both condemn the landlord as a con- 



6 THE ELEMENTS OF ECONOMICS 

scienceless profiteer. To secure such a distribution of 
wealth as will be most fair to all parties is an economic 
ideal toward which progress is being made. 

Economic Motives. — ^Men are impelled to work by a 
variety of motives and these motives are found in different 
proportions with different men. Self-interest is a powerful 
motive to induce men to work, but this is usually an en- 
larged self-interest. The pleasure of a night at the opera 
is more than doubled by sharing it with another. The 
same is true of a trip to Europe, an automobile ride, or 
anything that can give pleasure to a member of the family 
or to a friend. The phrase "economic man" was coined 
to describe a man wholly influenced by his own selfish 
interests. Such a man, if he ever existed, has fortunately 
been rare. The normal man works that he may secure 
necessities, comforts, and luxuries for himself and that 
he may provide a competence which will support him in 
ill fortune and in old age. But what he wishes for himself 
he doubly wishes for his wife and children and others de- 
pendent on him. 

Social esteem is also a powerful motive. Men like to be 
well thought of in the community in which they live and 
will shun employments which their friends and companions 
regard as dishonorable or degrading. Social esteem ex- 
plains why girls prefer to work in a factory rather than as 
domestic servants, even though the hours of labor and 
other conditions may be equal. The profession of law is 
held in high esteem, and every lawyer wants to be success- 
ful not only because of the income which success will in- 
sure but because of the standing his profession will afford 
him in his community. A successful lawyer wants to be- 



THE NATURE OF ECONOMICS 7 

come a judge, though his income as a judge may be much 
less than he could obtain as a lawyer. 

Another motive to economic activity is the desire for 
employment. For real men and women a certain amount 
of activity is pleasurable. For them loafing is the hardest 
kind of work. Many a man keeps at work because he likes 
to be employed when it is no longer necessary for him to 
"Work. 

The instinct for association is another motive for activ- 
ity. People want to do what others are doing, and in the 
United States, where most people are working, it is the 
fashion to work. In some countries, where there is a large 
leisure class and where work is not held in such high es- 
teem, a part of the population finds association in idleness. 

Altruism, or the desire to help others, causes economic 
activity among many of our people. Either impelled by re- 
ligion or ethics, most people want to leave the world better 
than they found it. They work and accumulate riches in 
order that they may endow colleges or hospitals or do some 
service for mankind. This motive is not confined to the 
very rich. Many a day-laborer, during the period of the 
war, gladly worked overtime for a season in order that he 
might make a contribution to some of the war charities. 

Summary. — Economics is a science which deals with man 
in his relation to wealth. Society may be regarded as an 
organism and every person has a service to perform for the* 
common good. All persons who can work and do not, are 
not only hurting themselves but are injuring society. 
Every science has some relation to economics, but history 
and sociology are especially helpful. From history we 
learn the experience of men and can avoid the mistakes 



8 THE ELEMENTS OF ECONOMICS 

and profit by the successes of those who have preceded 
us. Since the economic hfe of man is closely related to 
his other activities, sociology is helpful to the student of 
economics. For convenience in treatment, economics is 
divided into three sections: (i) The consumption of 
wealth, (2) the production of wealth, (3) the distribu- 
tion of wealth. Each section is closely related to the 
others. Some economists prefer to begin the discussion of 
our science with the production of wealth; others with the 
■consumption of wealth. Many motives impel men to 
work. Among the more important are self-interest, the 
desire for social esteem, the pleasure that comes from being 
employed, the instinct for association, and the desire to 
help others. i 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What is a science? Is economics less of a science than mathe- 

matics ? How do the social sciences differ from the physical 
sciences? 

2. Give some illustrations of the conflict between individual and 

social interests. 

3. Show how you are dependent upon others for the materials 

used in your classroom. How many men do you suppose 
contributed toward making your classroom what it is ? 

4. We have mentioned in the text five motives which impel men 

to work. See if you can find any other motives which influ- 
ence some men. 

5. Which motive do you think is the most important? Do the 

same motives appeal in the same proportion to a lawyer 
and a teacher? To a farmer and a clergyman? To a 
missionary and a pawnbroker? 

6. Professor F. A. Fetter of Princeton University speaks of men 



THE NATURE OF ECONOMICS 9 

being influenced to work by their desire to serve the public. 
Their reward is largely in 'Hheir own consciousness of duty 
well performed." This reward he calls "psychic income." 
Give an illustration of psychic income that has come to 
some persons in your community. What psychic income 
have you received? 
7. Some economists say that society is an organism. Others pre- 
fer to say that society is like an organism. Which expres- 
sion do you prefer? Why? 



CHAPTER II 

SOME CHARACTERISTICS OF MODERN ECONOMIC 

SOCIETY 

Private Property. — In modern times most property is 
owned by private persons. People care for the things 
which they can call their own. A man who owns his own 
home has a pride in its possession. He has a personal 
interest in his city and in the street on which he lives. 
This makes for good citizenship. Private property exists 
because it is to the interest of most people that it should 
exist. 

Private Enterprise. — ^As with property so industry is 
chiefly in private hands. Agriculture, manufacturing, 
mining, transportation, professional services, and banking 
are as a rule private enterprises. In some foreign coun- 
tries the State owns and operates the railroads, engages in 
the banking business, manufactyres and sells certain goods, 
but even in these countries most industries are privately 
owned and operated. 

Though private property and private industry are the 
rule, there is everywhere a certain amount of public con- 
trol. For example, corporations, before they can do busi- 
ness, must meet the conditions prescribed by law. Fac- 
tories must be run in accordance with the sanitary code 
and the legal requirements of labor. Rates charged by 
public-service corporations must not exceed legal rates. 
Food products must be clean and properly labelled. Nui- 

lO 



CHARACTERISTICS OF MODERN SOCIETY ii 

sances and illegal business are forbidden. Certain profes- 
sions like medicine, dentistry, and law cannot be practised 
unless a state examination be passed. Such regulations 
are in the interest of private persons, who would otherwise 
be unable to protect themselves against dishonest and 
grasping employers or incompetent professional men. 

Inheritance.— Closely associated with the right of own- 
ing property is the right of disposing of property. During 
the life of the owner there is no restriction in his power to 
sell his property, except that in most states a married 
man cannot sell land without his wife's consent. How- 
ever, his power to dispose of property after death is limited 
by all states. The law prescribes how wills must be made 
and makes provision in regard to the disposition of prop- 
erty in the absence of a will. In most states a man 
cannot disinherit his wife, and his minor children have 
rights that must not be ignored. In America, unlike Eng- 
land, land must not be left in entail, as it is called, if a 
will prescribes that an estate shall, pass to a certain class 
of heirs, like the eldest sons, through all future time. 

Vested Rights. — ^Vested interests are rights which cannot 
be disturbed unless the owners of these interests receive 
compensation. They usually exist in property or con- 
tract. Vested rights were everywhere in evidence in feudal 
times, extending even to offices. Professor R. T. Ely gives 
several survivals of mediaeval vested rights: ''Leeds was 
compelled by a feudal arrangement to grind its corn, grain, 
and meal at the lord's mill till well on in the last cen- 
tury, and finally had to pay £13,000 to terminate these 
obligations ! When Prussia bought the railroads, the rail- 
way presidents were indemnified for the loss of their posi- 



12 THE ELEMENTS OF ECONOMICS 

tions by large payments; in other words, their offices were 
looked upon as vested interests. England is the classic 
land of vested interests. An office in the army was until 
recently looked upon as such, and so was an appointment 
in the established church." In the United States vested 
interests have never played so important a part as in Eu- 
rope, doubtless because America never passed through a 
feudal regime. When the XVIIIth Amendment to the 
Constitution of the United States deprived them of the 
value of much of their property without compensation, the 
distillers and brewers advanced the claim that their vested 
rights were violated. However, the claim was not al- 
lowed. Street railroad companies in their competition 
with motor busses have sometimes been regarded as pos- 
sessing vested interests which protect them. 

Division of Labor and Exchange. — ^As has been said, 
most of us produce one commodity or part of a commodity, 
or render some personal service. We are paid in money 
and then we exchange our money for the things we want. 
Every one of us is dependent upon others. Even the 
lonely backwoodsman who gets his living by hunting and 
fishing is dependent upon thousands of others for his rifle, 
sugar, tobacco, coffee, and clothes. 

Freedom of Labor. — ^Laborers are free to move from one 
part of the country to another and may choose whatever 
employment they prefer. Under normal conditions la- 
borers seek the most remunerative opportunities open to 
them. If any trade or profession is overcrowded the pay 
to those engaged in it will fall and the workmen will seek 
other employments. So on the other hand if a great de- 
mand exists for some service or commodity, the remunera- 



CHARACTERISTICS OF MODERN SOCIETY 13 

tion for those providing it will rise high enough to attract 
the laborers who are needed. For example, when the 
World War began, the high wages offered by manufacturers 
of munitions of war attracted laborers from other factories 
and from the farms. When the war closed, the demand 
for munitions ceased and labor sought other employ- 
ment. 

Freedom of Capital. — ^Also there is freedom to invest 
capital in most industries. Large profits in any industry 
attract new capital to that industry. Small profits result 
in capital seeking other industries. The tendency is, 
therefore, for profits to become uniform in all industries. 
For example, a few years ago those who were engaged in 
the making of automobiles enjoyed large profits. This 
attracted capital into the automobile industry and com- 
petition between manufacturers lowered the price of cars 
and profits diminished. 

Restrictions on Freedom of Labor and Capital. — This 
freedom of labor and capital has not always existed. Un- 
til after the French Revolution, which began in 1789, both 
labor and capital were so restricted in France as to prevent 
laborers from moving from place to place, and capital was 
subject to many restrictions. Similar limitations on the 
freedom of labor and capital existed in other coun- 
tries. 

After the French Revolution the old restrictions on labor 
and capital were removed, but some new ones came into 
existence. The old restrictions upon labor were in the 
interests of the employers; the new ones were in the interest 
of the laborers. Laws limiting the hours of work, requiring 
one day of rest each week, prohibiting child labor, pro- 



14 THE ELEMENTS OF ECONOMICS 

tecting the workman from dangerous conditions are 
examples of restrictions that are advantageous to the 
laborers. 

Freedom to engage in some employments is restricted by 
law. Capital cannot be invested in industries which pro- 
duce goods for harmful purposes. The manufacture and 
sale of intoxicating beverages is restricted in the United 
States. Other industries, like the post-office, may be 
operated only by the government. Exclusive patent and 
copyright privileges limit competition in certain industries. 
All these restrictions are made because they are in the 
interest of the people. 

Though there is legal freedom to engage in most lines of 
business, this freedom may be restricted in other than legal 
ways. Capital seldom ventures into a field monopolized 
by some powerful corporation or combination of corpora- 
tions. As an illustration we may take the meat-packing 
industry of the United States. Many millions of dollars 
are invested by each of the packing companies and each 
has built a great business with agencies throughout America. 
Capitalists would hesitate before entering the meat-packing 
industry because that field is already occupied by powerful 
corporations. 

Competition. — The prevalence of competition in all in- 
dustry is well illustrated in the following quotation from 
Professor Fairbanks's Introduction to Sociology: ''The 
manufacturer of cotton goods chooses between competing 
places for his factory; the makers of his machinery are 
vying with each other to produce most economically the 
engines, looms, etc., that are best adapted to his work; 
raw products he buys from sellers competing in the open 



CHARACTERISTICS OF MODERN SOCIETY 15 

market; labor he hires from among men who bid against 
each other for his work; transportation companies com- 
pete with one another in cheaply transferring his goods to 
market; and in the market, seller is struggling with seller 
for the privilege of a sale with profit; buyer and seller bar- 
gain together, to agree on a price. The present century 
has seen barrier after barrier swept away, till the whole 
world enters more or less freely into one struggle; family 
and social distinctions are being obliterated in the indus- 
trial world; customs and laws in restraint of trade have 
been set aside." 

At its best competition seeks to render a better service 
at a lower price. It eliminates the incompetent and lazy, 
and this is a social service. Competition does not neces- 
sarily lead to monopoly, as business ability and resource- 
fulness are not limited to a few. Fair competition is a 
*'live and let live" competition, but there is also an unfair 
competition which seeks to drive its rivals out of business 
by any means, fair or unfair. Misrepresentation by a 
rival, securing trade secrets by bribery of employees, 
*' planting" a man in a rival's establishment to secure 
knowledge of his business, and temporarily lowering prices 
below the cost of production to drive a rival out of busi- 
ness are all examples of unfair competition. In many 
states local laws are directed against unfair competition 
and the Federal Trade Commission is empowered to pre- 
vent unfair competition by those engaged in interstate 
commerce. Fair competition is the rule in America. Most 
business men treat their competitors as they expect to be 
treated. An unfair competitor is soon discovered and finds 
that fair competition is the best policy. Business ethics is 



i6 THE ELEMENTS OF ECONOMICS 

nowhere higher than in the United States, and probably 
was never so high as now. 

Monopoly. — Various corporations producing similar 
goods may unite. If the combination controls all or a 
great part of the production it is a monopoly. Some 
monopolies exist because of the control of the source of 
supply. An example of this is the anthracite coal mo- 
nopoly. Others exist because of ownership of patents, 
and some others owe their existence to the fact that the 
services they render can best be supplied under monopoly 
conditions. Examples of this latter class are the gas com- 
panies and other public-service corporations. 

Custom. — Custom plays an important part in economic 
life. We become used to a certain standard of living and 
wish to hold to it. For example, custom prescribes that 
some people shall take a two weeks' vacation in the sum- 
mer, that they shall give and receive presents at Christmas, 
or that a new hat be bought for Easter. In many com- 
munities merchants are accustomed to subscribe definite 
sums each year to local charities. In parts of the South 
custom prescribes that certain occupations shall be followed 
by negroes exclusively. 

Retail prices are governed largely by custom. People 
pay the traditional price and buy in the usual quantities. 
Customs are not the same throughout the country. In 
some cities it is customary to buy groceries in small quan- 
tities, and potatoes are sold by weight; in other parts of 
the country potatoes are seldom sold in smaller quantities 
than a peck. Custom causes white eggs to command 
higher prices in some cities than brown eggs, but in other 
cities brown eggs are preferred. In France it is the cus- 



CHARACTERISTICS OF MODERN SOCIETY 17 

torn of the peasants to save something each year and to 
invest the savings in stocks and bonds. 

Every one of us is influenced by custom. Some customs 
are good, others harmful. Economic progress comes^from 
acquiring good economic customs and changing bad ones. 

Summary.^ — Private property is the rule in modern in- 
dustry. This is because it is to the advantage of most 
people. Some industries are owned and operated by the 
people through their representatives. For example, the 
postal service of the United States is owned and operated 
by the national government and most cities own and 
operate their waterworks. Whether any kind of business 
should be publicly or privately owned depends upon which 
method will serve the people better. As a rule people may 
enter any kind of business they wish, but in some profes- 
sions there are legal restrictions to prevent incompetent 
men from doing business. For example, men may not 
practise medicine until they satisfy the state authorities 
that they possess the proper qualifications. Competition 
is the rule in most business enterprises. Competition is 
beneficial when it is a fair competition, but it is subject to 
abuse. State and national laws exist to check unfair com- 
petition and to encourage fair competition. Monopoly is 
the absence of effective competition. 

Custom plays a large part in the life of every one of us. 
We eat fish on Friday and chicken on Sunday, go to a ball- 
game on Saturday afternoon, and read the morning paper 
every day. ,, These are customs, and each has an economic 
influence. 



1 8 THE ELEMENTS OF ECONOMICS 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Sociologists say that most people should try to own their own 

homes. Do you agree? Why? What agencies are there 
to help people own their own homes ? Why do more people 
own their own homes in Philadelphia than in New York? 
In Indianapolis than in Chicago? In the country than in 
the cities? 

2. Should the amount of inheritances be limited -by law? If so, 

what should be the limit? Show some instances in which 
inherited property has been a benefit to the recipient and 
to society. Show some evils that have resulted from in- 
herited property. 

3. Why should a man be compelled to pass an examination before 

he can practise medicine ? Why should he not be required 
to pass an examination before opening a grocery store? 
Many states require a year or more study in college before 
a person may begin the study of medicine in a medical 
college. Is this a reasonable restriction? Why? 

4. Give some examples of customs that have an effect upon 

economic life in your community. What customs are bene- 
ficial to the community as a whole? What customs are 
harmful ? 

5. What are the economic results of the custom of giving presents 

at Christmas? What considerations other than economic 
ones enter into the giving of Christmas presents? 



CHAPTER III 
WANTS AND THEIR SATISFACTION 

Elementary Wants. — The most elementary wants for 
every one of us are food, drink, clothing, and shelter. 
Man shares these wants, except clothing, with the animals. 
Primitive men were satisfied with the simplest things. 
With an increase in civilization the elementary wants be- 
came refined. Food and drink must be clean and attrac- 
tively served. Clothing and shelter must be pleasing to 
the eye. 

Cultural Wants. — Every advance in civilization has 
brought new wants. An ability to read develops into a 
desire to read and appreciate the best literature, not only 
in one language but in several. A love of music, once 
satisfied by the beating of tom-toms or a jazz band, be- 
comes a love for symphony concerts, or other forms of 
music which are really music to a cultured taste. A mul- 
titude of wants arise, such as travel, study, art, and social 
service. Fortunately these wants can in many cases be 
supplied even to those whose wealth is very limited, and 
culture does not always vary directly with a person's in- 
crease in wealth. It is a well-known fact that in the great 
opera-houses, the poor man in the gallery often more keenly 
enjoys the performance of a grand opera than does the 
occupant of an orchestra seat. The want of religious con- 
solation, present in an elementary way in a savage, be- 
comes to many persons -of refinement, a most important 

19 



20 THE ELEMENTS OF ECONOMICS 

want, and for its satisfaction .vast sums of money are 
expended. 

As old wants are satisfied, new ones appear. Were this 
not the case, Hfe would hardly be worth the living. We 
no sooner, for example, learn the use of a rowboat, than 
we want a sailboat, then a motor-boat. Seeing others 
receiving pleasure incites us to desire to imitate them. It 
was a brave man who ate the first raw oyster, but he gave 
indications of enjoyment and soon eating oysters became 
popular. 

Education causes a host of wants to arise. The study 
of literature causes the desire to own books and to subscribe 
for a literary magazine; a growth of the artistic sense pre- 
vents one from being satisfied with the crude art of the 
Sunday papers and leads to a desire to possess reprints of 
works of art. The educational process is to a large degree 
the refinement of old wants and the creating of new ones. 

Advertising Creates Wants. — Advertising not only tells 
us where goods may be obtained, it also creates a desire to 
possess these goods. A new automobile, operating on a 
new principle, is advertised and at once some persons want 
to see it and, if the demonstration is satisfactory, to secure 
one. The newspapers announce a new breakfast food and 
the billboards blazen its catchword, and thousands buy 
it to see what it is like. 

Goods. — ^Whatever satisfies a human want is a good. Its 
want-satisfying capacity is called utility. All goods are 
known as wealth, and the term is not limited to great riches. 
The peddler's cart is wealth just as much as is the million- 
aire's automobile. Personal services such as those of a 
physician satisfy wants and are utilities. 



WANTS AND THEIR SATISFACTION 21 

Free Goods and Economic Goods. — Some goods are fur- 
nished in such quantities by nature that there is enough 
for all and to spare. These goods are known disfree goods. 
Air and water are examples of free goods. Free goods 
decrease in number with growth of population and fuller 
occupation of the land. In colonial times wood for fuel 
was so abundant that any one could have it who would 
take the trouble to cut down a tree; game was plentiful 
and was often given away. Economic goods are limited 
in amount and are secured only after an effort. Under 
certain conditions goods which are usually free goods may 
become economic goods and vice versa. Water, if it be- 
come so scarce as to be difficult to obtain, may be an 
economic good. An unusually large crop of apples, where 
shipping facilities are lacking, may make apples so abun- 
dant as to be free to any one who desires them. 

The Consumption of Goods. — The consumption of goods 
means the using up or destroying their utilities. Some 
goods are destroyed in satisfying a single want; such goods 
are known as perishable goods. Other .goods, like a wagon, 
may satisfy many wants before becoming unserviceable, 
and such goods are called durable goods. Few goods are 
absolutely durable, though land might be so called in some 
respects, as its supporting power is not destroyed, though 
every farmer knows that if it is not enriched at intervals 
its productive power wears out. 

Present and Future Goods. — Future wants are usually 
less highly regarded than present wants, and finished prod- 
ucts which are able to satisfy a present want are more 
highly esteemed than goods which will be available for use 
only at some future time. Most persons would prefer 



22 THE ELEMENTS OF ECONOMICS 

$ioo at the present time rather than |ioo six months from 
now. The future is always uncertain; of the present alone 
we may be sure. 

Useful and Harmful Consumption. — ^Any use of goods 
which aids a person physically or morally is a useful con- 
sumption. For example, if a laboring man spends a Satur- 
day afternoon at a ball-game and comes home with his 
nerves rested and a good appetite for dinner, the time and 
money may have been spent to advantage. A night of 
dissipation on the other hand leaves a man unfit for work 
the next day and is not an economic use of time or money. 
The spending of money upon harmful drugs or whiskey is 
uneconomic because the use of these articles reduces ability 
to work, but reasonable expenditures for recreation of a 
wholesome kind increase ability to work and are therefore 
economic. 

Public Wealth. — Our wants are satisfied not alone by 
the possession of private property. Public property satis- 
fies many wants. Public roads, parks, bridges, art gal- 
leries, museums, schools, and hospitals are examples of 
public wealth. Another variety of public wealth is such 
natural wealth as rivers, lakes, harbors, and public forests. 
Public wealth belongs to all of us collectively, and it should 
be a matter of concern to all citizens that public property 
should not suffer at their hands and that they do not allow 
others to injure it without their protest. To disregard 
signs requesting people not to walk on the grass, to injure 
shrubbery in a park, or carelessly to cause a forest fire are 
offenses which a good citizen never commits. 

Summary. — Elementary wants are those for food, drink, 
clothing, and shelter. Even primitive men had these 



WANTS AND THEIR SATISFACTION 23 

wants. As civilization increased these wants became re- 
fined and cultural wants appeared. Wants are satisfied 
by goods and services. Some goods are furnished by nature 
in such abundance that they are free to all men. Others 
are limited in quantity and an effort is required to secure 
them. These goods are economic goods. In satisfying 
wants goods are consumed. Goods that are destroyed in 
satisfying a single want are perishable goods. Goods that 
satisfy a series of wants are durable goods. Useful con- 
sumption of goods is any use of goods which gives pleasure 
or satisfaction without harm to the body or mind. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Why are breakfast foods and crackers usually sold in boxes 

rather than in bulk ? Is the extra expense justified ? 

2. Show that a man's place in the scale of civilization is deter- 

mined by the nature of his wants. 

3. Even a savage enjoys music, but we are told that the best 

music is appreciated only by those who have a cultivated 
taste. How does a jazz band compare with a symphony 
orchestra ? What agencies for the promotion of good music 
exist in your community? 

4. Give some examples from your own experience of goods which 

are ordinarily economic goods becoming free goods. What 
goods which were once free goods in your community are 
now economic goods? 

5. Under what circumstances may it be an economic expenditure 

of time and money to attend a moving-picture show ? When 
would it be uneconomic? 



CHAPTER IV 
CONSUMPTION OF WEALTH FURTHER CONSmERED 

The Law of Satiety. — ^At any one time any want is capa- 
ble of being completely satisfied, or satiated. For example, 
a person may be exceedingly hungry. A piece of bread 
would be devoured eagerly and this might be followed by 
other pieces until the time would come when the desire for 
bread would be satiated. The total utility of the bread to 
this person would be the utility derived from all the slices 
he had eaten in satisfying his hunger. 

The Law of Diminishing Utility. — The satisfaction from 
the first sHce of bread would be great. Let us indicate it 
by the numeral lo. The second slice would give less 
satisfaction, which may be indicated by the numeral 9. 
Each subsequent slice would be less desired, until the 
tenth slice would give only a satisfaction which would be 
expressed by the numeral i. After consuming ten slices, 
no more bread is desired, the point of satiety has been 
reached. The utility of the last piece eaten is the marginal 
utility, that is, the piece which yields the least satisfaction. 
The following table shows total utility and marginal utility 
in the illustration of the successive slices of bread: 



Units of Bread 


Satisfaction Derived 


I 


10 


I 


9 


I 


8 


I 


7 


I 


6 



24 



CONSUMPTION OF WEALTH 25 



Units of Bread 




Satisfaction Derived 


I 
I 

I 
I 
I 






5 
4 
3 
2 
I marginal utility 


otal Units 10 


Total 


Utility 


55 



Of course, if the consumption of bread stopped short of 
the point of satiety, the total and marginal utility would 
be otherwise. For example, if only five slices of bread 
were consumed, as will be seen by the figures, the total 
utility would be 40 and the marginal utility would be 6. 
To consume more bread than the ten slices would be posi- 
tive discomfort, or disutility. 

The law of diminishing utility applies to all things. To 
the lover of music a symphony concert is a great pleasure, 
but after listening to a concert for two hours, the desire for 
music is for the time satisfied and additional concerts fol- 
lowing at once would be a disutility. The same rule ap- 
plies to material objects which render a series of satis- 
factions. One phonograph might be intensely desired; 
another of the same kind would not be a cause of much 
satisfaction; while a third would not be wanted in the 
same household. 

The Law of Variety. — Since we cannot have everything 
we want, we spend our money for those things which we 
want the most. There is a constant balancing of the 
advantages afforded by one kind of expenditures over 
those which might be afforded by another. We must 
often choose between present wants and future wants. A 
prudent person who cannot enjoy a summer vacation. 



26 



THE ELEMENTS OF ECONOMICS 



except at the expense of being without coal during the 
coming winter, will forego his vacation. 

Every satisfaction costs something in terms of other 
possible enjoyments; not only is this the case, but there is 
a balancing of the pleasure of consumption against the 
pain, or discomfort, of additional production. By working 
overtime a person might gain income for increased con- 
sumption, but he may decide that the extra effort is not 
worth while. 

The Economic Order of Consumption. — The consump- 
tion of a good is seldom continued to the point of satiety; 
greater satisfaction is afforded by stopping short of the 
point of satiety in any one good and consuming other 
goods. Thus if a person had seventy-five cents to spend 
for his dinner, he would not spend it all upon bread. 
The more economic order would be to use part for potatoes, 
meat, coffee, and a dessert. Thus we might divide the 
seventy-five cents into ten units of 7.5 cents each and the 
economic order of consumption would be somewhat like 
the following: 







Commodities 






Bread 


Potatoes 


Meat 


Dessert 


Coffee 


9 


10 


12 


10 


9 




9 


II 

10 

9 


9 





In this case 7.5 cents would be spent for bread; 15 cents 
for potatoes; 30 cents for meat; 15 cents for dessert; and 
7.5 cents for coffee. The marginal utility is 9 in each 



CONSUMPTION OF WEALTH 27 

commodity and the total utility of all the commodities 
is 98. 

Consumer's Goods and Producer's Goods. — Some goods 
are used to satisfy wants. These are called consumers^ 
goods. Others are used in the production of more goods. 
These are producers'' goods. Coal which is used to heat a 
dwelling is a consumers' good; if used to produce power 
to run a factory it is a producer's good. In a later chapter 
we shall discuss producers' goods. Consumers' goods may 
be classified as necessaries, comforts, and luxuries. 

Necessaries.^Necessaries are those goods which must 
be consumed in order to preserve health and strength. 
There should also be included those goods, which although 
not necessary in a physical sense, are necessary in order 
to preserve self-respect. ''A linen shirt, for example, is, 
strictly speaking, not a necessary of life. The Greeks and 
Romans lived, I suppose, very comfortably, though they 
had no linen. But in the present time, through the greater 
part of Europe, a creditable day-laborer would be ashamed 
to appear in public without a linen shirt, the want of 
which would be supposed to denote that disgraceful degree 
of poverty which it is presumed nobody can well fall into 
without extreme bad conduct. Custom, in the same 
manner, has rendered leather shoes a necessary of life in 
England. The poorest creditable person of either sex 
would be ashamed to appear in public without them. In 
Scotland custom has rendered them a necessary of life to 
the lowest order of men, but not to the same order of 
women, who may, without any discredit, walk about bare- 
footed. Under necessaries, therefore, I comprehend, not 
only those things which nature, but those things which 



28 THE ELEMENTS OF ECONOMICS 

the established rules of decency have rendered necessary 
to the lowest rank of people." * 

Comforts. — The dividing-line between necessaries and 
comforts is not easy to find. Comforts are not necessary 
for existence, nor, perhaps, for self-respect, yet most people 
regard comforts as essential to a reasonable standard of 
living. A straw hat in August is not a necessity and its 
absence would not be seriously felt, but most men regard 
it as almost a necessity. A second suit of clothes may 
not be a necessity, but would be a comfort. Pictures to 
adorn the walls and cushions for the chairs might also be 
classified as comforts, though if unusually fine they might 
be luxuries. 

Luxuries. — ^Luxury may be defined as any article which 
ministers to comfort or pleasure, and yet is not necessary 
to life or to what is regarded as an ordinary degree of 
comfort. Luxury does not increase one's ability, although 
the desire to secure luxuries may be a motive to ecbnomic 
activity. The saying is old and true that the luxuries of 
one generation are the necessaries of the next, which means 
that increased production makes it possible to satisfy new 
wants without sacrificing essentials. What is a luxury 
for one person may be a necessity for another. An old 
and valuable violin might be a luxury for an amateur, but 
a necessity for a professional violinist. An automobile is 
a necessity for many physicians but may be a luxury for 
a college professor. One class of luxuries deserves con- 
demnation and to this class belong those luxuries which 
gratify onh' the sense of vanity and vulgar display. 

* Adam Smith, The Wealth of Nations. 



CONSUMPTION OF WEALTH 29 

Luxuries do Not Increase Demand for Labor. — We fre- 
quently hear the remark that the lavish expenditure of 
money for a ball or some other luxury is not without its 
advantages; it gives employment to labor. This is quite 
analogous to the oft-heard statement that the burning of a 
building means that masons and carpenters will now have 
a job. In the case of the house, society is poorer for the 
loss of the house, even though the insurance company pays 
the loss and in this case the insurance company must re- 
strict its investments elsewhere to pay the loss. In the 
case of luxury there is a demand for the labor which pro- 
duced the luxury, but the expenditure probably would 
have been made elsewhere if not for luxury, and even if 
the money had remained in the bank, the bank could have 
loaned it for some useful purpose. 

This whole subject is discussed most entertainingly by 
Doctor R. T. Ely. 

''Shallow as he was, Frederic Bastiat undoubtedly said 
many good things, and is entitled to our gratitude for 
having cleared up, as no one else, some of the first princi- 
ples of economics. Perhaps one of his happiest efforts was 
his exposition of the difference in industrial society be- 
' tween that which is seen and that which is not seen. A 
worthy shopkeeper, Jacques Bonhomme, is enraged be- 
cause his careless son breaks a pane of glass, while the 
spectators who gather around the scene offer this conso- 
lation to the father : ' It is an ill wind that blows nobody 
good. Everybody must live, and what would become of 
the glaziers if panes of glass were never broken.' Who 
among my readers has not heard similar expressions of 
opinion? And how many of them are there who do not 



so THE ELEMENTS OF ECONOMICS 

feel that there is a certain justice in the view of the indif- 
ferent but good-natured spectators? . . . 

"Jacques Bonhomme, the shopkeeper, was just on the 
point of ordering a new pair of shoes for his wife, for which 
he expected to pay six francs. These shoes he is now un- 
able to order on account of his loss, and the shoemaker 
misses his opportunity to earn six francs. This is what is 
not seen, but it is beyond all controversy that no addi- 
tional employment has been given to labor because the 
careless son broke the pane of glass. . . . My good friend 
who spends two hundred dollars on a single dress sees em- 
ployment given. She does not perceive that if she had 
given twenty calico dresses to as many poor old ladies, 
quite as much work would have been given to sewing- 
women. Extravagance finds no justification on the plea 
that it gives employment to labor." * 

Family Budgets. — ^A family is, among other things, a 
business concern and as such it should keep an account of 
income and expenses. A well-managed family, from a 
business point of view, will calculate its income and appor- 
tion its expenses so that they will fall within the income. 
This calculating of income and arranging of expenses is 
called making a budget. A budget should always include 
savings, and a budget makes savings possible by eliminating 
much foolish spending. If the average family could see 
the total amount spent yearly upon matters of little im- 
portance, it would speedily effect a reform. Unfortunately 
few families keep accurate accounts of their expenses; they 
know some of the great expenses such as those for rent and 
fuel, but most families could only roughly estimate such 

* Problems of To-Day, chap. XV. 



CONSUMPTION OF WEALTH 



31 



major expenses as those for food and clothing. Not only 
are the facts unknown to many families, but the investi- 
gator finds that his inquiries are resented. . 

In 1857, Doctor Ernst Engel, the well-known Prussian 
statistician, published the result of his investigations in 
reference to family budgets. The following table shows 
the facts which Doctor Engel's studies disclosed: 



Items of Expenditures 



Food 

Clothing 

Rent 

Fuel and light . . 
Tools, etc. . . . . . 

Education 

Taxation 

Care of health . . 
Personal service 



Per Cent of Expenditure of 



A Laborer's 
Family 



62) 

16 

12 

5 



^1 

I 
I 



95 
per cent 



per cent 



A Middle-Class 
Family 



55 

18 

12 

5 

3 

2 
2 
2, 



■5] 



90 
per cent 



10 
per cent 



A Family of 
Wealth 



50 

18 

12 

5 



85 
per cent 




• From the above table it will be seen that a German laborer with an 
annual income of $1,000 might be expected to spend $620 for food, $160 for 
clothing, $120 for rent, $50 for fuel and light, etc., $20 for education, $10 
for taxes, $10 for care of health, and $10 for personal services. A man 
with an income of $3,000 per year would spend $1,650 for food, $540 for 
clothing, $360 for rent, $150 for fuel and lights, etc., $105 for education, 
$60 for taxes, $60 for care of health, and $65 for personal services. A per- 
son with an income of $10,000 per year would be expected to spend $5,000 
for food, $1,800 for clothing, $1,200 for rent, $500 for fuel, etc., $550 for 
education, $300 for taxes, $300 for care of health, and $350 for personal 
services. 



EngePS Law. — From these investigations Doctor Engel 
derived the following four deductions which are known as 
Engel's Law: 



2>2 



THE ELEMENTS OF ECONOMICS 



1. As the income increases, the relative expenditure for 
subsistence becomes smaller. 

2. The percentage of expenditure for clothing is prac- 
tically the same, no matter what be the income. 

3. The percentage of expenditure for rent, and for fuel 
and lights is constant. 

4. As the income increases, the percentage spent for 
education, amusements, health, etc., constantly increases. 

Since Doctor Engel's day many investigations of family 
budgets have been made, among the most notable those 
of the United States Bureau of Labor in 1891, which in- 
cluded over 2,000 families, and the investigation of 1903, 
which included over 11,000 families. 



AMERICAN FAMILY BUDGETS 
From the Annual Report of the Bureau of Labor for 1903 



Family Income 



Under $200 

$200-$300 

$300-$400 

$400-$5oo 

$5oo-$6oo 

$6oo-$7oo 

$7oo-$8oo 

$8oo-$90o 

$900-$!, 000. . . . 
$i,ooo-$i,ioo. . 

$I,I00-$I,200. . 

$1,200 and over 



Per Cent of Total Expenditure 



Food 



SO-9 
47-3 
48.1 
46.9 
46.2 

43.5 
41.4 
41.4 

39-9 
38.8 

37-7 
36.5 



Clothing 



8.7 
8.7 
10,0 
II. 4 
12.0 
12.9 

13-5 
13.6 
14.4 

14.9 

15-7 



Rent 



16.9 
18.0 
18.7 
18.6 
18.4 

18.5 
18. 1 
17. 1 
17.6' 

17-5 
16.6 
17.4 



Fuel and 
Light 



Miscel- 
laneous 



iS-6 
18.8 
16. 1 

16.5 

17.2 

19.4' 

21.6 

23.0 

23.2 

23-7 
26. 1 

25-4 



These budgets and others seem to show that in America 
Doctor Engel's conclusions hold in reference to expendi- 



CONSUMPTION OF WEALTH ss 

tures for food; are true in the main in regard to ex- 
penditures for education, amusements, etc., are very nearly 
true in regard to rent, but are not to be accepted in re- 
gard to clothing and fuel and light. The percentage 
spent for clothing slowly increases in the United States 
with increased income and the percentage for fuel and 
light slowly decreases. 

Some Recent Family Budgets.* — In 191 7 a board of arbi- 
tration was appointed to determine the cost of living in 
Seattle and Tacoma. The occasion of this arbitration 
was a dispute between the Puget Sound Traction, Light, 
& Power Company, the Tacoma Railway & Power Com- 
pany, and their employees. The award was based upon 
actual studies regarding cost of Hving and provides a 
^'minimum-comfort budget" based upon a family of five, 
it is somewhat higher than a '' minimum-health budget." 

MINIMUM-COMFORT BUDGET FOR ONE YEAR FOR 
A FAMILY OF FIVE 

Groceries, meat, fish $533 .40 

Fuel 60 . 00 

Clothing — man 90 • 50 

Clothing — woman 87 .00 

Clothing — girl of 8 or 9 32 • 50 

Clothing — boy of 14 48 . 50 

Clothing — boy of 5 or 6 33 • 00 

Maintenance of household equipment 40. 00 

Education 1 1 . 00 

Church — fraternal dues 20.00 

Medicine — doctor, dentist 60.00 

Insurance , 30.00 

Savings 100 . 00 

Gas 20 . 00 

Electric light 15 -oo 

* For recent family budgets see Standards of Living, a Compilation, of 
Budgetary Studies, Bureau of Applied Economics, Washington, D. C. 



34 THE ELEMENTS OF ECONOMICS 

Rent and water $184 . 00 

Street-car fare 35 • 7° 

Tobacco, ice cream 30 . 00 

Recreation — movies, etc 30 . 00 

Incidentals — stamps, barber, etc 25 .00 

Miscellaneous 20 . 00 

Total $1 ,505 • 60 

TOTAL BUDGET 

Clothing. $291 . 50 

Food 533-40 

Sundries 366 . 00 

Rent, etc 314-70 

Total. , $1,505 .60 

The Bureau of Personal Service of the New York Board 
of Estimate and Apportionment presented in February, 
191 7, a budget based upon the cost of Hving for an un- 
skilled laborer in New York City. This is a minimum- 
comfort budget and is for a family of five: A wage-earner, 
his wife, and three children; all the children are of school 
age and contribute no earnings to the family. (See p. 35.) 

Minimum-Wage Laws. — It is apparent that a high 
standard of living is impossible without a living wage. A 
proper standard of living must include a dwelling-place, 
adequate in size and appointments, good food in sufficient 
amount, clothing suitable for each season, fuel and lightj, 
an insurance fund, as well as a reasonable expenditure 
for recreation and culture. Since a considerable per- 
centage of the population does not receive a large enough 
wage to maintain such a standard of life, proposals for a 
minimum wage secured by law have frequently been made. 
These proposals do not imply that a high standard of 
living shall at once be introduced; they rather look toward 
the abolishing of the necessity of a low standard. 



CONSUMPTION OF WEALTH 



35 



MINIMUM-COMFORT BUDGET FOR A FAMILY OF FIVE 
IN NEW YORK CITY 



1915 



1917 



I. Housing 

11. Carfare 

IIL Food 

IV. Clothing 

V. Fuel and light. 

VL Health 

VII. Insurance 

VIII. Sundries 



$168.00 


$168.00* 


30 30 


30 30 


383.812 


492.388 


104 . 20 


127 . 10 


42.75 


46.75 


20.00 


20.00 


22.88 


22.88 


73.00 




73.00 



Total per year. 



$844,942 



Sundries classified: 

Papers and other reading matter 

Recreation 

Furniture, utensils, moving expenses, 

etc 

Church dues 

Incidentals — soap, washing material, 

stamps, etc 



Total. 



0.411 



*5-Oo 
40.00 

18.00 
5.00 

5.00 



$73 -00 



* It will be noted that the rise in rents did not begin until after 19 17. 

In Victoria, Australia, minimum-wage laws were first 
applied, beginning with six underpaid trades and later in- 
creased to apply to one hundred and forty-one. More 
recently minimum-wage laws have been introduced in 
England. In both of these countries the results have 
been approved by laborers and have not been detrimental 
to capital as had been anticipated. The minimum wage 
does not mean that such a wage must be the maximum; 
of course, a laborer must earn his minimum wage, or lose 
his job. The minimum wage tends toward making the 



36 THE ELEMENTS OF ECONOMICS 

laborer efficient enough to earn it, and there have been no 
wholesale discharges from employment in Victoria or Eng- 
land on account of the law. Minimum-wage laws are not 
always approved by labor-unions, as they fear the mini- 
mum will be the maximum, but this fear is groundless. 
There will, however, be a tendency toward replacing labor 
by machinery, and, generally, a slight rise in price to con- 
sumers. If a minimum-wage law be passed it must be 
revised at frequent intervals. A minimum wage adequate 
in 1 9 14 would be ridiculous now, and a law fixing a mini- 
mum wage now might make it too high to be fair two 
years from now. 

In the United States minimum- wage laws are not re- 
garded with approval. The labor unions prefer to make 
their own minimum-wage laws, and unorganized labor is 
inarticulate. The State can, however, by being a model 
employer of labor itself set the standard for other em- 
ployers. 

Though there has been no experience in the United 
States with general minimum- wage laws, twelve states 
have passed laws having reference to minimum wages of 
women and children. These laws are not supposed to 
affect the general standard of wages but to require that 
women and children shall not work for less than a living 
wage. Some of these states have fixed a minimum rate of 
wages for women and children; others have created com- 
missions which decide upon a proper minimum wage and 
which may change the rate as the cost of living changes. 

The constitutionality of minimum;wage laws is not 
positively determined. A decision of the Supreme Court 
of the United States involving the constitutionality of the 



CONSUMPTION OF WEAI.TH 37 

Oregon law was handed down on April g, 191 7. This 
decision left the Oregon law unchanged b}^ a tie vote, Mr. 
Justice Brandeis not voting, as he had represented Oregon 
before his elevation to the Supreme Court, when the case 
was before the Supreme Court of Oregon. 

Summary. — Any want is capable of being satisfied. 
With each additional unit of any good consumed, satis- 
faction becomes less. The utility of the last unit con- 
sumed is the marginal utiKty. Greater total satisfaction 
may be obtained by variety in consumption than by con- 
suming one good until the point of satiety is reached. 
Family budgets show the relative consumption of various 
articles and from them Professor Engel deduced his famous 
law. A high standard of Kving requires a proper wage and 
therefore there have been proposals for a minimum-wage 
law. Experiments with minimum- wage laws in Victoria 
and England have not been conclusive. There is little 
demand for minimum-wage laws in the United States. 
The production of goods is determined by the demand, and 
consumers may determine, to a large extent, the conditions 
of production. Thrift is an economic virtue, extrava- 
gance is a vice. Necessaries and comforts should be pre- 
ferred to luxuries. Luxuries do not increase the demand 
for labor. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Secure a number of family budgets from members of your own 

community. See how these compare with the budgets 
presented in the text. 

2. Compare expenses for sugar, flour, potatoes, clothing, and rent 

in your community in 1913, 1918, and at the present time. 



38 THE ELEMENTS OF ECONOMICS 

What are the reasons for differences in cost? Have wages 
risen and fallen in proportion to prices? 

3. In an automobile factory in Detroit there is a minimum wage 

of $5 a day. If this wage is higher than the average in 
other competing factories in Detroit, what will be the 
effect upon them ? If wages are higher in the automobile 
factories of Detroit than in those of Toledo, what will be 
the result, (a) upon labor, (b) upon the cost of production? 

4. What is a luxury? May luxuries ever be defended? Is a 

luxury for one person always a luxury for another ? Illus- 
trate this by some examples. 

5. Show that luxury does not increase the demand for labor. 

What effect has luxury upon the demand for labor? 

6. Arrange a minimum-comfort budget for a family of five in 

your community, the family consisting of a man and his 
wife, a boy in high school, a girl of twelve, and a boy of 
five years of age. 

7. Does it require a larger income to live in comfort now than 

when your father was a boy ? Why ? Do you spend more 
money than he did ? Do you have a better time than he 
did? Does he think so? 

8. What items of expense are greater in the country than in the 

city ? What articles cost less in the city ? Show the rela- 
tive advantages of country and city life. 

9. Show why you favor or oppose minimum-wage laws. 

10. Find the opinion of local labor leaders on minirnum-wage laws. 



CHAPTER V 
THE PRODUCTION OF WEALTH 

Nature of Production. — Man cannot increase the ma- 
terial matter of the earth. He can, however, so change 
material things as to enable them to satisfy human wants. 
This process of changing things is the production of wealth. 
A large part of the production of wealth consists of putting 
things into a form in which they will satisfy human wants. 
This is known to the economist as the creating of foi'm 
utility. Manufacturing is the creation of form utility. 
Iron ore satisfies no human want, lDUt commodities which 
satisfy wants may be made from it. Putting goods in the 
place in which they may satisfy a human want is another 
process in the production of wealth. This is called place 
utility. Transportation agencies of all kinds furnish place 
utility. 

A third variety of utiHty is time utility, which is created 
by those who furnish the goods at the time they are 
wanted. All stores and storage agencies furnish time utili- 
ties. Before most goods are ready for use, various agen- 
cies have contributed form, place, and time utilities. For 
example, a sheet of ice covering a Maine lake in Febru- 
ary would not render an economic service. Men who cut 
the ice into cakes of convenient size for transportation 
produce form utility, the storage-house which keeps the 
ice until summer creates time utility, and the various agen- 
cies which place it where it can be used produce place 

39 



40 THE ELEMENTS OF ECONOMICS 

utility. Since it is evident that goods in the possession of 
the consumer have a greater value than before they reach 
the consumer, we may use the term possession utility as 
applying to this increased utility, and all agencies which 
contribute to possession utility are productive. 

Personal Services. — Not only are economic services ren- 
dered by those who are concerned in the production of 
material things, but also by those who produce utilities of 
a non-material nature. John Stuart Mill divided people 
into two classes, producers and non-producers, and to the 
latter class he consigned those who rendered personal ser- 
vices. However, personal services satisfy human wants of 
a very intense nature and those who render such services 
are producers of utilities. For example, a dentist, when 
he extracts an ulcerated tooth, renders a service much to 
be desired and indirectly he aids the production of material 
things, inasmuch as he puts the laborer upon whom he 
operates in a condition to produce material commodities. 
Likewise lawyers, physicians, teachers, clergymen, actors, 
servants, and all others who render personal services, pro- 
duce utilities which satisfy human wants, and each of 
them, in one way or another, indirectly aids in the pro- 
duction of material goods. 

Non-Producers. — Unfortunately every community has 
its idle classes, those of an age at which they should be 
producers who are simply living at the expense of others. 
This class does not include those who are still completing 
their education, or those who have retired from active 
service, having earned a rest after years of toil. Economics 
has been called the glorification of labor, and to the econ- 
omist the idle rich and the idle poor alike stand con- 



THE PRODUCTION OF WEALTH 41 

demned, if they can work and refuse to do so. No honest 
labor is degrading in the eyes of the economist, and every 
loafer, whether rich or poor, is a parasite. Mere acquisi- 
tion of wealth does not mean production; wealth may be 
obtained by fraud, theft, or gambling, but such acquisition 
is without the rendering of useful service or production of 
utility. Economic progress largely consists in increasing 
the per-capita production of wealth, as it is obvious that 
the more goods produced, the more will be available for 
consumption. 

Factors in the Production of Wealth. — Three things are 
essential in all modern production of wealth. These are 
nature (some economists say land), labor, and capital. 
Nature and labor are original factors, but capital — being 
itself produced by nature and labor — is a derived factor. 

Nature. — The various powers of nature, such as the ex- 
pansive power of steam, the force of gravity, the power of 
electricity, the force of the winds, and many others, are 
used in the production of wealth. Rivers, lakes, and 
oceans furnish means of transportation and supply oppor- 
tunities for securing fish, seals, sponges, and other material. 
Most important among the contributions of nature is land. 
The most obvious contribution of land is standing room 
to support people, plants, animals, and buildings. Mere 
standing room is not enough to make land valuable, as 
deserts and waste places furnish that in abundance. Min- 
erals, upon or under the surface, are a most important con- 
tribution of land. Situation, which makes land available, 
is always an important element. Coal deposits in Penn- 
sylvania are much more useful than in Alaska, because 
they are easily sent to market, can be worked throughout 



42 THE ELEMENTS OF ECONOMICS 

the year, and labor is obtainable in sufficient amount. 
Situation sometimes alone would make land valuable, as 
is the case in regard to city land, where fertility is of no 
importance. Fertility of the soil and location are both 
elements of importance in agriculture. 

Land as Property. — In a primitive society land is seldom 
private property; it belongs to the tribe collectively. Men 
in such a condition of society obtain their living chiefly by 
hunting and fishing and gathering the wild fruits and nuts, 
but as animals and plants become domesticated and popu- 
lation increases, much of the land becomes private prop- 
erty. The waters of rivers, lakes, and oceans are not 
usually appropriated by individuals, though inland waters 
and waters of oceans within a three-mile limit, as well as 
enclosed bays, are regarded as national waters. 

The Influence of the Land upon the People. — ^A popu- 
lation will generally devote itself to that kind of industry 
for which the country which it inhabits is suitable. Well- 
wooded country will support a lumbering industry, at 
least until the trees are cut. Some lands are worthless 
for agriculture but valuable for ore; some are suitable for 
vineyards but worthless for cotton. In case lands may be 
used for various purposes, the industry which produces the 
largest return in value of products will be the one to which 
the population sooner or later will resort. 

Increase in Land. — The area of the earth cannot be in- 
creased, but it is possible to increase the useful area. The 
man who drains a swamp, clears the stone from a field, or 
makes fertile a barren piece of land increases the available 
land. 

Through the Reclamation Service of the Department of 




o 

Pi 

H 
H 
< 



O 

o 
< 
u 

I— I 

w 
u 



44 THE ELEMENTS OF ECONOMICS 

the Interior much has been done to increase the available 
land in the United States. The Imperial Valley of Cali- 
fornia is now one of the garden spots of America; before the 
water of the Colorado River was brought to this valley it 
was a desert waste. Thousands of acres have been re- 
claimed by irrigation in Arizona, New Mexico, and Wyo- 
ming and other western states. Improved methods of 
agriculture, such as "dry farming," may also increase 
available lands. 

Increased means of transportation also makes available 
the use of land which previously could not be worked 
economically because of distance from a market. 

The Influence of the Consumer upon Production. — Con- 
sumers, by their demands, determine to a large degree 
what shall be produced and how it shall be produced. 
Every act of production requires the co-operation of nature, 
labor, and capital. It is desirable that goods be produced 
which will make the least demand upon land, labor, and 
capital, and which can adequately satisfy wants. This has 
been called the law of the least social cost. 

If the land of a community be well suited to the growing 
of potatoes and corn and poorly adapted to the growing of 
wheat, it is better that the inhabitants consume more 
potatoes and corn than wheat. Even though they ex- 
change potatoes and corn for wheat grown elsewhere, 
there is the cost of transportation and exchange to be con- 
sidered. It is equally important that men be employed at 
what they can do best. 

Not infrequently the failure of laborers to do that which 
they can do best is not the lack of demand, but ignorance 
of opportunity or some social cause. Thousands of Italian 



46 THE ELEMENTS OF ECONOMICS 

immigrants, who were excellent agricultural laborers in 
Italy, come to the United States every year and take em- 
ployment in the cities at work for which they never had 
any training and at a time when good agricultural laborers 
were never more needed. 

The influence of the consumer upon conditions of pro- 
duction is shown by consumers' leagues, which are organi- 
zations of consumers pledged not to consume articles pro- 
duced by child labor or where other conditions of produc- 
tion are socially bad. Goods produced under approved 
conditions sometimes bear a label, testifying to this fact. 
A union label is sometimes attached to goods produced by 
organized labor. The effort of producers to inform the 
public concerning conditions of production, shows that the 
consumers may influence the conditions of production. 

Thrift versus Extravagance. — Thrift is care and pru- 
dence in the management of one's resources. At no time 
in our history has thrift been more necessary than in these 
years following the Great War. War causes the destruc- 
tion of many economic goods, piles up national debts, and 
takes millions of laborers from productive employments to 
be supported at public expense. But this is not all; a 
prosperity, often fictitious, encourages extravagance, or 
possibly the extravagance is caused by a desire to forget 
war and its consequences. This is not confined to the 
United States; victorious France and defeated Germany 
alike have been extravagant spenders, and at a time when 
increased production and economy in consumption were 
urgently needed. 

As an example of the influence of extravagance upon 
prices and demand for labor let us consider for a moment 



THE PRODUCTION OF WEALTH 47 

the extravagant use of an automobile for pleasure pur- 
poses. A man who has saved only $1,000 withdraws it 
from the bank and buys an automobile. His demand for 
gasoline tends to increase the price of gasoHne for produc- 
tive purposes; his car needs repairs frequently and the 
number of men withdrawn from other occupations into 
automobile repairing increases; he, like thousands of his 
kind, goes touring, and garages in every little village are 
made to minister to his wants and men are withdrawn from 
agriculture and land withdrawn from cultivation in order 
that he may be served. It is not too much to say that 
extravagance in the purchase and use of automobiles for 
pleasure purposes is a contributing cause to the high cost 
of living. 

Mr. Andrew Carnegie remarked some years ago that our 
troubles were not so much concerned with the high cost of 
living, but the cost of living high, and if it were uttered 
more or less as a jest, many truths are so uttered. A high 
standard of living does not mean an extravagant standard 
of living. The road to economic prosperity is not being 
trod by those who think they must spend every cent they 
earn. Thrift and saving are virtues to be commended. 

When production exceeds consumption there is economic 
progress; on the other hand, if consumption is greater than 
production there is an economic decline. With production 
exceeding consumption capital is accumulated and new 
factories, dwellings, and other utilities may be erected, but 
if a community is consuming more than it produces, it is 
living on past accumulations which will in time be ex- 
hausted. In time of war consumption usually exceeds 
production; vast numbers of men are withdrawn from 



48 THE ELEMENTS OF ECONOMICS 

ordinary economic activities and put into military service 
where they produce no economic goods, but consume 
immense quantities of food, clothing, and war supplies. 
Another host of laborers at home is withdrawn from peace- 
ful and productive activities and put to work making sup- 
plies for the army. Though other influences are also at 
work, this alone accounts for the scarcity and resultant 
prices of goods during war times. There can be no re- 
covery from high prices until production not only catches 
up with consumption, but passes it. Of all the belliger- 
ents on the continent of Europe in the recent war, Belgium 
was the first to settle down to work after the war was over, 
and it bids fair to reach soon its pre-war production. It is 
work and thrift which win in war or in peace. A man who 
produces less than he consumes is an economic liability and 
not an asset. 

Summary. — The production of wealth is the creation of 
form, place, time, and possession utilities. Those who 
render personal services also create utilities and are pro- 
ducers of wealth. Every producer of wealth is an aid to 
the economic life of a community. Every person who is 
able but unwilling to work is a detriment to any com- 
munity. Land, labor, and capital co-operate in the pro- 
duction of wealth. Each is dependent upon the other. 
Labor and land can do little without capital, nor can any 
combination of two factors do much without the third. 
Although the area of the earth's surface cannot be in- 
creased, it is possible to increase the useful area. Capital 
is increased by savings. The greater the supply of land 
and capital, the more is the demand for labor. War de- 
stroys capital and labor. Hence it diminishes production 



THE PRODUCTION OF WEALTH 49 

of wealth. Even land may be injured by war. Parts of 
Belgium, once rich agricultural lands, were flooded for 
years with salt water and cannot become productive for 
generations. Much of the land of northern France has 
been injured by being impregnated with gases and the 
top soil blown away by explosions. Work and saving 
enable a country to recover from war conditions. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Are teachers producers of wealth? Are editors? Are gam- 

blers ? Why ? 

2. Give a list of non-producers of wealth. Show what non-pro- 

ducers are detrimental to a community. 

3. The city of Chicago has filled in the lowlands which formerly 

formed the border of Lake Michigan and has reclaimed 
much land that was once covered with water. The Chicago 
lake front, once an ugly spot, has become a park. What 
land in your community has become available in recent 
years? What lands now idle in the vicinity of your city 
may be made useful? 

4. Show how railroads increase the available lands of a country. 

What economic services are rendered by wagon-roads? 
Show how poor roads increase the cost of agricultural com- 
modities. Are the country roads near your city in good 
condition? How might they be improved? 

5. Show how the Reclamation Service of the Department of the 

Interior has made land available for use in Arizona, Wyo- 
ming, and New Mexico. Write to Department of Interior, 
Washington, D. C, for information on reclamation. 



CHAPTER VI 
LABOR AND POPULATION 

The second factor in the production of wealth is labor. 
To the economist all effort directed toward the production 
of wealth is labor, whether this effort be of mind or body. 
The effectiveness of labor is influenced by many quali- 
ties, the most obvious of which is strength. Other things 
being equal, a strong man can work better than a weak 
one. Physical strength alone is of little value; many of 
the lower animals far surpass man in that. Moral quali- 
ties, such as temperance, truthfulness, and reliability are 
needed. Mental traits such as skill, quickness, and me- 
chanical ingenuity are also necessary. 

Labor is much more efficient under good physical sur- 
roundings. It pays to have factories well lighted and 
ventilated and properly equipped in other respects. Social 
esteem adds to the productiveness of labor. Wherever 
labor is held in low esteem it produces little. If labor is 
highly esteemed men do not seek to avoid it and they 
have pride in their calling. 

Temporary Lowering of Efficiency of Labor. — In the 
United States the efffciency of labor was undoubtedly 
lowered during the war and immediately after its close. 
In 1914 a capable bricklayer would lay 1,900 bricks per 
day for a wage of $5. Bricklayers in 1920 did not average 
more than half the efficiency of 19 14, though wages in 

50. 



LABOR AND POPULATION 51 

1920 were $9 per day. This loss in efficiency was partly 
caused by the necessity during the war of getting labor 
of any degree of ability. During the war any man who 
could work at all could get a job, and high wages at- 
tracted all kinds of men. Professor David Friday, in a 
valuable contribution to economic science, remarks : * 

^' There seems to be a general opinion among employers 
and managers that the efficiency of labor to-day is as low 
as 60 per cent of its 1914 level. Now an average payment 
of 210 per centf for an efficiency of 60 per cent means a 
unit cost for labor of 350 per cent, as against 100 in 19 14. 
If the efficiency of labor is as high as 70 per cent, then the 
labor cost per unit of output is 300 per cent of what it was 
then. That such an increase in cost per unit of output 
must exercise a powerful effect upon price is apparent. 
Not only is the cost of the labor element in production 
increased, but the overhead costs are also greater as the 
time consumed in production is longer. 

''This fall in output per laborer has proceeded at an 
unusual rate since the summer of 191 9. Coupled with 
the increase in money wages there seems little doubt that 
there has been since the armistice a general increase in the 
labor cost per unit of at least one-third and possibly one- 
half." 

In the late autumn of 1920 and the winter of 1921 there 
was ia gradual increase in the efficiency of labor. Indus- 
trial plants discharged less efficient laborers and so raised 
the general average of efficiency. Though a war may 
render labor less efficient for a time, as soon as normal con- 

* Profits, Wages and Prices, p. 109. 

t The average increase in wages since 19 14. 



52 THE ELEMENTS OF ECONOMICS 

ditions are restored efi&ciency begins to return to old 
standards. 

Division of Occupation and Division of Labor. — No man 

can do all things equally well; a jack-of-all- trades has ever 
been a master of none. Since this is true it is much better 
for a man to confine his attention to those things which he 
can do well and exchange his labor or the goods which he 
produces for the other articles which he needs. This is 
division of occupation. The advantages of division of 
occupation were understood very early in the history of 
mankind. Among savage tribes the arrow-heads were 
made by men who were skilful workers in stone, the shafts 
were made by other men, and the bows by yet another set 
of men. As civilization increased the division of occupa- 
tion increased, and in modern times there is a greater 
specialization, which we call division of labor. Few men 
make an entire article. For example, fifty years ago there 
were still men who made an entire shoe, but now there are 
a score of operations in the making of a shoe and each 
worker is confined to one of these operations. One man 
cuts out the upper, another cuts the sole, another sews 
the upper, another runs a machine that makes eyelets, 
another puts on the heel. Thus the shoe is made by a 
number of men, no one of whom could make an entire 
shoe. This division of labor holds in all employments. A 
striking example of the minute division of labor in the 
great packing-houses is given by Professor Commons: 

^'It would be difficult to find another industry where 
division of labor has been so ingeniously and microscopi- 
cally worked out. The animal has been surveyed and laid 
off like a map; and the men have been classified in over 



54 THE ELEMENTS OF ECONOMICS 

thirty specialties and twenty rates of pay from i6 cents to 
50 cents an hour. The 50-cent man is restricted to using 
the knife on the most dehcate parts of the hide (floorman) 
or to using the axe in spHtting the back-bone (spKtter); 
and wherever a less skilled man can be slipped in at 18 
cents, 18/^ cents, 20 cents, 22^ cents, 24 cents, and so on, 
a place is made for him and an occupation mapped out. 
In working on the hide alone there are nine positions at 
eight different rates of pay. A 20-cent man pulls off the 
tail, a 22/^-cent man pounds off another part where the 
hide separates readily, and the knife of the 40-cent man 
cuts a different texture and has a different 'feel' from that 
of the 50-cent man. Skill has become specialized to fit the 
anatomy." 

Division of labor is not confined to manufacturing and 
commerce. It has entered the professions. Not long ago 
the high-school teacher was supposed to be able to teach 
Latin, French, and mathematics as chief subjects and de- 
vote any spare time to history and English. Now every 
good high school has teachers who are specialists. In 
medicine, dentistry, and law a similar development of 
specialists has occurred. 

Advantages of the Division of Labor. — Division of labor 
has several advantages. In the first place practice in 
doing one thing produces great skill. To one watching a 
girl packing candy in a large candy factory, the skill and 
rapidity of motion which she shows seems wonderful, but 
there is nothing remarkable about it. It is the result of 
long practice. Then there is much time saved that would 
be lost in passing from one sort of work to another. Also 
machinery is fully utilized, and invention stimulated, be- 



LABOR AND POPULATION 55 

cause, as Adam Smith said: ''Men are much more likely to 
discover easier and readier methods of obtaining any object, 
when the whole attention of their minds is directed to that 
single object, than when it is dissipated among a great 
variety of things." Many inventions have been made by 
common laborers, who have found new methods of doing 
some part of their work. Through the division of labor 
many more things can be produced by the same number of 
men and the cost of making goods is therefore reduced. 

Disadvantages. — It is often maintained that division of 
labor takes away the pride which a working man might 
have in his product. A man might enjoy making a pair 
of shoes, but what intellectual stimulus can come from 
running a machine which stamps eyelets? The deadly 
monotony of a single operation repeated all day long is 
also urged as a disadvantage. However, division of labor 
has come to stay and to grow in importance. With an 
eight-hour working-day and increased time and oppor- 
tunity for education and recreation, the alleged disad- 
vantages seem trivial as compared to the advantages. 

The Geographical Division of Occupation. — ^A geograph- 
ical division of occupation in the United States is notice- 
able. The growing of spring wheat is the leading industry 
of Minnesota and the Dakotas; corn is the great crop of 
Illinois, Kansas, and the other states of the ''corn belt"; 
cotton is produced in the Gulf States; small fruits are grown 
in central New York, New Jersey, Delaware, and Cali- 
fornia; and tobacco is grown in Virginia, Kentucky, and 
the Carolinas. 

Collars and cuffs are made more largely in Troy than 
elsewhere; more than half the gloves manufactured in this 



56 THE ELEMENTS OF ECONOMICS 

country are produced in the adjoining cities of Glovers- 
ville and Johnstown, New York; Paterson, New Jersey, 
specializes in silk; East Liverpool, Ohio, and Trenton, New 
Jersey, are noted for their potteries; Brockton, Massa- 
chusetts, is a centre of boot and shoe manufacturing; and 
Fall River, Massachusetts, is chiefly concerned in making 
cotton goods. 

Causes for Geographical Division of Occupations. — The 
thirteenth census of the United States gives several reasons 
for the localization of industry: 

1. Nearness to raw materials. Other things being equal, 
nearness to raw materials aids industry. The flour-mills 
in Minneapolis, tobacco factories in Richmond, packing- 
houses in Kansas City, and many other local industries are 
thus explained. 

2. Nearness to markets. 

3. Water-power and coal. Water-power originally 
helped New England. More recently it has created the 
manufacturing industries of Niagara Falls. Though now 
of less importance than proximity to a supply of fuel, 
water-power, on account of new methods of generating 
power and converting it into electricity promises to regain 
its former importance. 

4. A favorable climate. For example, the moist cli- 
mate of Fall River is favorable to the cotton-manufactur- 
ing industry. 

5. A supply of suitable labor. 

6. Local capital available for investment. 

7. The advantage of an early start. 

Increase in Population. — The character and number of 
the people are of the utmost importance to a country in 



LABOR AND POPULATION 57 

its economic life. It is possible for a country to have more 
people than can be supported decently by the resources of 
that country. When this is the case the surplus popula- 
tion must either be decreased by emigration or suffering 
will result. On the other hand a country may not have 
enough people to utilize its resources. The United States 
has been a country which could utilize not only its own 
people but could offer employment to large numbers of 
immigrants. The population of the United States has 
therefore been increased by two methods: (i) The excess 
of births over deaths, (2) by immigration. 

Natural Growth of Population. — Where the birth-rate 
is high, the death-rate is usually correspondingly high. 
Roumania has the highest birth-rate in Europe and also 
the highest death-rate. Italy, Hungary, Saxony, and Ba- 
varia have high birth-rates and high death-rates. The ec- 
onomic condition of a people does not seem to influence 
the birth-rate, but the birth-rate affects the economic 
condition. The overpopulated countries — 'and overpopu- 
lation means more people than the country can well sup- 
port in the present condition of arts and sciences — have 
a low standard of life and a high birth-rate. 

France has the lowest birth-rate and lowest death-rate 
of the great European countries and the standard of living 
is higher than in any of the other countries of continental 
Europe. Roumania, with a low standard of living, has a 
birth-rate of 40.7 per thousand and a death-rate of 29.3 per 
thousand. Contrast the birth-rate of 22.2 per thousand 
and the death-rate of 21.5 per thousand in France with 
the rates in Roumania. The French people are thrifty 
and prudent, and marriages are not contracted unless there 



58 



THE ELEMENTS OF ECONOMICS 



is a fair prospect of being able to support a family in some 
degree of comfort. 

The insistence upon maintaining a high standard of life 
is the chief force making for a low birth-rate. 

The birth-rate in the United States for the calendar year 
191 7 was 24.6 per thousand and the death-rate was 14. i per 
thousand. When the country was new and there were 
unlimited possibilities for making a living and when agri- 
culture was overwhelmingly the chief industry, naturally 
the birth-rate was high. As the country grew and city 
life became more common — and it must be remembered 
country children become an economic asset much sooner 
than children in the city — the birth-rate declined. 

The United States is so large and conditions are so di- 
verse in the different states that vital statistics for the 
whole give little indication of conditions in any part of 
the country. States with a large colored population, as a 
rule, have both larger birth and death rates than those 
with a small colored population. The death-rate has been 



BIRTH AND DEATH RATES OF SOME TYPICAL STATES 

FOR 1917 ' 





Estimated Population 


Birth-Rate 
per Thousand 


Death-Rate 
per Thousand 


New York 

Wisconsin 


White, 

Colored, 

White, 

Colored, 

White, 

Colored, 

White, 

Colored, 


10,288,042 
172,140 

2,512,275 
14,862 

1,556,433 

40,967 

1,143,092 

230,581 


23-5 
22.6 

23-5 
13-7 
14.4 
27.2 
24.1 
27.9 


14.6 
24.8 

II-5 
13.0 

7-4 
16.2 
150 
27.1 


Washington 

Maryland 



LABOR AND POPULATION 59 

on the decline for many years, the result of better sanita- 
tion and better treatment of disease. 

The birth-rate and the death-rate depend among other 
things upon the standard of Kving. As a rule the negroes 
have a lower standard of living than the whites and they 
are therefore less able t,o resist disease. States like Wash- 
ington, where a smaller proportion of the population are 
infants and old people, because the state attracts many 
young men from the East, would naturally have a lower 
death-rate than New York. 

The Malthusian Theory of Population. — John Jacques 
Rousseau (17 12-1778), a brilliant French philosopher, 
began his work, The Social Contract, with the statement 
that ''Man was born free and is everywhere in chains." 
Man, he thought, is naturally good, but has been degraded 
and corrupted by what is called civilization. Nature does 
everything well. Human institutions are all wrong. The 
remedy is to return to a simple and virtuous life such as 
existed in primitive society. 

Though Rousseau's reasoning was opposed to all the 
teachings of history and psychology, it gained ready 
acceptance in many countries. 

In England Thomas R. Mai thus (i 773-1836) attacked 
the doctrine of Rousseau in his famous book, The Theory 
of Population. Mai thus claimed that the greatest cause of 
suffering and misery is that population tends to increase 
faster than subsistence and that without moral or social 
restraints of any kind, the population will reach a point 
where comfortable subsistence is impossible. With the 
maximum birth-rate and the minimum death-rate, Malthus 
maintained that the population would double in twenty- 



Oo THE ELEMENTS OF ECONOMICS 

three years. Nature, he stated, provides positive checks 
upon a redundant population, and these are famine, pesti- 
lence, and war. That the population of India, China, 
and possibly Japan has increased to such an extent as to 
make these positive checks operative can hardly be doubted, 
and a portion of the population in many other countries is 
in about the same condition. 

Malthus stated that the preventive check of prudence 
would prevent the application of positive checks. The 
state of civilization of a country is indicated by the kind 
of check placed upon increase in population. In countries 
like India and China positive checks operate; in countries 
more advanced the population insists upon maintaining a 
high standard of life, and in such countries the Malthusian 
law in its harsher manifestations does not operate. Many 
attempts have been made to disprove the Malthusian 
theory, but it stands accepted by most scientists of the 
present day. 

Immigration. — The United States has had large addi- 
tions by immigration and, because living conditions are 
better here than in most countries, we have lost few by 
emigration. Immigrants have come to this country chiefly 
because they wished to better their economic condition, 
though from time to time political or religious persecution 
has caused people to come to this country. 

Immigration before 1883 was chiefly from the north of 
Europe; since 1883 it has been chiefly from central and 
southern Europe and from Russia. 

The immigration into the United States in the last year 
before the Great War was 1,218,480; during the war immi- 
gration practically ceased, but in the spring and summer 



LABOR AND POPULATION 6i 

ARRIVALS OF ALIEN PASSENGERS AND IMMIGRANTS 



Country of Last 
Permanent 
Residence 


1871-1880 


1881-1890 


1891-1900 


1901-1910 


1911-1918 


Austria-Hungary . 

Germany 

Italy 

Norway 


72,969 
718,182 

55,759 
1 211,245 

52,254 
436,871 


353,719 
1,452,970 

307,309 
568,362 
265,088 

655,482 


597,047 

543,922 

.655,694 

95,264 

230,679 

593,703 
403,496 


2,145,266 
341,498 

2,045,877 
190,505 
249,534 

1,597,306 

339,065 


895,937 
142,892 

1,012,495 

59,955 

86,969 

918,803 

136,116 


Sweden 

Russia 


The United King- 
dom 





of 1920 the tide of immigration began to rise and was 
apparently only limited by the small tonnage available for 
transporting it.* 

The immigration before 1883 is generally known as the 
*'old immigration." It came from the United Kingdom, 
Germany, Sweden, France, and the neighboring countries. 
The immigration since 1883, known as the "new immi- 
gration," has come chiefly from Italy, the Balkan coun- 
tries, and the lands which were once Russia and Austria- 
Hungary. 

* A new immigration law, known as the Dillingham percentage immigra- 
tion law, went into effect on June i, 192 1. This law limits the nimiber 
of immigrants to be admitted during the year 1 921-192 2 to. 3 per cent of 
their countrymen in the United States, according to the census of 1910. 
This law is a temporary one and postpones rather than solves the question 
of immigration. 

Under the law 77,206 immigrants will be allowed to enter from the 
United Kingdom during the fiscal year; from Norway, 12,116; Sweden, 
15,956; Denmark, 5,644; the Netherlands, 3,602; Belgium, 1,557; Luxem- 
bourg, 92; France, 5,692; Switzerland, 3,745; Germany, 68,039; Danzig, 
285; Finland, 3,890; Africa, 120; Portugal, 2,269; Spain, 663; Italy, 42,021; 
Russia, 34,247; Austria, 7,444; Hungary, 5,635; Roumania, 7,414; Bulgaria, 
301; Greece, 3,286; Czecho-Slovakia, 14,269; Jugoslavia, 6,405; Albania, 
287; Fiume, 71; Poland, with Western Galicia, 25,800; Eastern Galicia, 
5,781; Australia, 271, and New Zealand, 50. 



62 THE ELEMENTS OF ECONOMICS 

Immigration into the United States is prohibited to 
those who have dangerous diseases or are hable to become 
public charges, as well as those with criminal records or 
who are tainted with anarchistic doctrines or other polit- 
ical heresies which would make them undesirable citizens. 
After being vetoed by two previous presidents, a bill was 
signed in 191 7 by President Wilson forbidding immigra- 
tion into the United States by those who were unable to 
read in some language. 

Sociologists and economists differ upon what should be 
the immigration policy of the United States. Those who 
favor increased restrictions — and some would even extend 
the restrictions against Chinese and Japanese immigration 
to the rest of the world — contend that the new immigra- 
tion is not equal to the old. The old immigrants were of 
the same racial stock as the bulk of the American popula- 
tion, possessed the same political ideals and were readily 
assimilated, but the new immigrants are racially different, 
will not readily accept American institutions and will not 
he assimilated. It is further argued that America no 
longer needs immigrants, as the public land has been occu- 
pied and the immigrants must compete with Americans for 
employment, and they will lower the standard of living by 
accepting a wage upon which an American could not live. 
That the new immigrants herd in cities and keep up their 
own language and institutions is also advanced against the 
new immigrants. 

Those opposed to further restrictions deny that the new 
immigration is bad and claim that the new immigrants are 
becoming citizens and good citizens; that their children 
.are sent to American schools and prefer to use the English 



LABOR AND POPULATION 63 

language; that our high schools and colleges every year 
show an increased number of children of new immigrants; 
that many have taken some part in pubKc affairs; that the 
new immigrants were second to none in the support they 
gave the United States during the Great War. It is also 
said that the country needs a larger supply of labor and 
the standard of living is not permanently lowered because 
the immigrant soon learns what wage the American is 
getting and demands the same for himself. If the new 
immigrant lives cheaply, so did once the German and the 
Irish. The old immigrant became assimilated and so will 
the new immigrant. 

Americanization.* — Many thousands of immigrants have 
come to the United States who have never learned to 
speak, readj or write the English language. To these must 
be added a large number of native-born Americans who 
cannot read or write English and who know little or nothing 
concerning American institutions or self-government. The 
total number of these classes reaches the astonishing figure 
of eight millions. The South has the greater number of 
illiterates; the North leads hi non-English-speaking popu- 
lation. 

Americanization is an effort to assist the native and 
foreign-born illiterate to learn the English language and to 
be able to take part in the best that America can offer to 
its people. It has nothing in common with the efforts 
which the old Russian Empire made to Russianize the 
province of Finland and of Turkey to suppress the liberties 
of the Armenians or of the Germans and Austrians, before 
the fall of the empires of central Europe, to crush the 

* See Appendix. 



64 THE ELEMENTS OF ECONOMICS 

national customs of their subject peoples. Americaniza- 
tion seeks to help the less fortunate among our population 
so that they can take an intelligent part in our life, may 
know our -heroes and make them their own, and may share 
in the economic advantages that our country offers. 
Americanization not only concerns itself with the immi- 
grant and the native illiterate but it helps the Americans to 
understand the immigrant, to sympathize with him, and 
to know his value to the country. The immigrant must 
not think that we do not care for him. We must care 
concerning his welfare and must welcome him to a com- 
mon enjoyment of the advantages which our country 
offers. 

Summary. — The efficiency of labor depends upon physi- 
cal qualities such as health, strength, and intelligence. 
Moral and mental qualities are no less necessary. Divi- 
sion of occupation and division of labor increase efficiency. 
The population of the United States has increased (i) by 
the excess of births over deaths, (2) by the excess of im- 
migration over emigration. A country may be overpop- 
ulated or underpopulated. According to the Malthusian 
theory overpopulation has been a chief cause of human 
suffering. The United States on account of its great re- 
sources has always attracted immigrants from less fortunate 
countries. The ''old immigration" came from northern 
Europe; the ''neW immigration" comes from southern Eu- 
rope, central Europe, and Russia. It is necessary that 
immigrants be taught our language and institutions. The 
object of Americanization is to help the immigrant and to 
help America. 



LABOR AND POPULATION 65 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What are the leading industries of your city? For the manu- 

facturing of what articles has your city exceptional advan- 
tages? What are these advantages? 

2. Is labor in your city more or less efficient than five years ago? 

Why? Ask the opinion of some manufacturer. Also ask 
some laborer. 

3. Visit some local factory and study the division of labor. 

4. Should immigration into the United States be further re- 

stricted? How would the prohibition of all immigration 
affect the industries of your city ? What would be its influ- 
ence upon wages? 

5. What is Americanization? What efforts toward Americaniza- 

tion are being made in your city? How can you help 
Americanization ? 

6. What have Italian immigrants done for America ? What bene- 

fits have come from German immigrants? from Irish? 
from Hebrew? from Scandinavian? from English? 



CHAPTER VII 
THE NATURE AND USE OF CAPITAL 

When Robinson Crusoe tried to catch fish with his hands 
he found the task difficult. A few poor and unpalatable 
fish were all that he could secure. The thought came to 
him that by spending a few hours in making a Hne from a 
grape-vine and fashioning a hook from a bone he would be 
more successful. He was not disappointed. But the best 
fish were still beyond his reach. He therefore spent several 
days in chopping down a tree and from it making a dug- 
out canoe. Then a net was made from some rope that he 
had salvaged. Thus equipped he ventured out to sea and 
in a few hours caught enough fish to last for days. The 
line and hook, the boat and net were capital. It took 
labor to make them and he was obliged to -wait for his 
reward until the fish were caught. 

Capital is sometimes called ''the produced means of 
production." It consists of all the products created by 
labor in co-operation with nature, which are not used to 
satisfy present wants, but are used for the making of more 
goods. Tools, machinery, buildings, wagons, raw mate- 
rials, railroads, and all other material goods used in the 
production of wealth are capital. Bank-accounts, which 
are necessary for the conducting of business, are capital, as 
is also the money necessary to carry on a business. 

Land is not capital. It is a gift of nature and the laws 
governing the earning power of land are different from 

66 



THE NATURE AND USE OF CAPITAL 67 

those governing the returns to capital. The knowledge 
and skill a man possesses are not capital; they are a part 
of himself. Goods used to satisfy wants are not capital. 
They are known as "consumers' goods/' to distinguish 
them from "producers' goods" or capital. 

Capital and Capital Goods. — The business man does not 
use the term "capital" in exactly the sense in which it is 
used by economists. To the business man the term capital 
means the value of his equipment in money, plus the money 
used to carry on the business and the bank accounts which 
the business has acquired. Many business men would also 
include "good-will," patents, and trade-marks as part of 
their capital. 

Some economists distinguish between "capital" and 
"capital goods"; using the term "capital goods" to apply 
to machinery, tools, buildings, and other goods which wear 
out during the process of production and are constantly 
being replaced and repaired. "Capital" they use as the 
value of these goods in terms of money, including also the 
value of other aids to production. 

Fixed and Circulating Capital. — ^Economists distinguish 
between fixed and circulating capital. Fixed capital is 
capable of being used many times, while circulating capital 
is consumed in one act of production. It is fitly called 
circulating capital, for its value passes into the article pro- 
duced. For example, a boiler is fixed capital; the coal 
that is fed into the boiler is circulating capital. The dis- 
tinction is one of degree only, as no capital is unaffected 
by use. Another example of fixed capital is the machinery 
in a candy factory. The sugar used in making candy is 
circulating capital. 



68 THE ELEMENTS OF ECONOMICS 

Free and Specialized Capital. — Some of the material 
aids to production are capable of many uses, and such 
capital goods are free capital. An ordinary building may 
be used for several purposes and such raw materials as 
wood, coal, and iron can be used in making a great variety 
of goods. Highly specialized machinery or a building 
suitable to only one kind of industry is specialized capital. 
For example, a type-setting machine can be used for one 
purpose only and is specialized capital, but the dynamo 
that furnishes power to run the machine is free capital and 
could be used in other industries. 

Public and Private Capital. — Capital may be classified 
as to ownership into public and private capital. Public 
roads, bridges, canals, as well as public buildings used in 
the production of wealth are examples of public capital. 
Inasmuch as court-houses, public records, jails, and schools 
are all necessary to the production of wealth, they may 
well be included under public capital. 

The Roundabout Process of Production. — The capital- 
istic process of production is an indirect or roundabout 
method. The direct method of getting fish would be to 
catch them in the hands, but this method seldom produces 
large returns. To make a line, fashion a hook, and secure 
bait is an indirect method of getting fish, but it results in 
more fish being caught. To build steam trawlers, make 
nets and other apparatus is still more indirect, but the 
returns are correspondingly larger. Similarly all employ- 
ment of capital is an indirect method of production. 

Capital Formation. — It is evident that no capital would 
be formed if men consumed all they produced. Capital is 
the result of saving, and a person who saves is rendering a 



THE NATURE AND USE OF CAPITAL 69 

social service by this thrift. One of the causes of the 
high cost of living during, and following, the Great War, 
was the extravagant habits that led men and women to 
spend most of what they produced, and thus checked 
capital formation. It is an error to think that capital is 
owned only by the wealthy. Every person who owns a 
tool is a capitalist. Every one who has a savings-bank 
account is a capitalist and his capital enables the bank to 
lend money which is used in industry. 

For the formation of new capital the first essential is 
production, then there must be saving. Then the invest- 
ing of savings in some form of production must follow. 
Whether this process is completed by the same person 
makes no difference. The person who saves and lets 
others invest his savings is as truly adding to the capital 
of the country as though he directly constructed a fac- 
tory. 

Replacement Funds. — Inasmuch as capital goods wear 
out by use, all business men must include as a part of the 
costs of production, a replacement fund. If a machine 
wears out in five years, there must be set aside during 
these five years not only enough to keep the machine in 
repair but enough to replace it when worn out. 

All losses incident to the conduct of business must be 
made good by replacement funds supplied directly or by 
means of insurance. 

War destroys much capital and for such unusual de- 
struction no provision of replacement funds is ordinarily 
made or can be made. Even in countries outside the zone 
of conflict, the energies of the people are directed to war 
industries and replacement funds are largely neglected. 



70 THE ELEMENTS OF ECONOMICS 

The railroads of the United States came out of the war not 
quite a wreck, but in a badly demoralized condition, short 
of motive power, rolling stock, and general equipment. 

Summary. — Capital is ''the produced means of pro- 
duction." It is necessary to all modern production of 
wealth. Fixed capital may be used many times, but cir- 
culating capital is consumed in one process. Specialized 
capital can be used for one thing only, but free capital is 
capable of several different uses. Most capital is owned by 
private persons or corporations. Public capital consists of 
roads, bridges, canals, and other direct aids to the pro- 
duction of wealth. Since the maintenance of order and the 
enforcement of contracts is necessary, court-houses and 
halls of records are pubHc capital. Hospitals, asylums, 
public schools, public libraries, museums, parks, and other 
public property aid directly and indirectly in the produc- 
tion of wealth and are pubhc capital. 

The capitalistic production of wealth is a roundabout 
process. The direct way to go from Marion, Ohio, to 
Terre Haute, Indiana, is to walk. The building of a rail- 
road or an automobile is an indirect method. When 
Robinson Crusoe wanted a pair of shoes he killed a pair of 
rabbits and wrapped their hides around his feet. We 
build factories, buy machinery, and produce shoes in a 
roundabout method. 

The formation of capital depends upon savings. If we 
consume all we produce there can be no increase in capital. 
Every one who has a bank-account is a capitalist and so is 
every one who owns a tool or a piece of machinery which 
is used in the production of wealth. Most capital is pri- 
vate, but public capital is also important. The capitalistic 



THE NATURE AND USE OF CAPITAL 71 

method of production is a roundabout process. Capital 
is the result of saving. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Is capital necessary in all production of wealth? If a boy 

kills a pheasant with a stone has capital been employed? 
Mention some other instances of production of wealth with- 
out capital. 

2. Name some specialized capital that is in use in your own city. 

Give some instances of capital that has been diverted from 
one use to another. 

3. Why might a jail be considered public capital? A school- 

house? A court-house? 

4. Show the indirect method of supplying water in your city. 

5. What are the chief methods by which savings are encouraged in 

your city? 

6. What method did Robinson Crusoe follow to get a new suit 

of clothes? Show how the capitalistic method would be 
introduced as population and capital grew. 



CHAPTER VIII 
MARKETS, VALUE, AND PRICE 

Any place where buyers and sellers come together to 
transact business is a market. In early times open spaces 
in each city were set apart for markets and here came 
buyers and sellers. The Forum at Rome was originally a 
market-place and so was the Agora at Athens. Markets 
like those of the ancient times may still be seen in many 
parts of America. The farmers drive into town on market- 
day and the townsfolk go to the market-place to buy. 
Prices are fixed by demand and supply. For example, the 
farmers may first offer potatoes at two dollars a bushel, but 
if there are more potatoes than can be sold at this price, 
some farmer, rather than take his potatoes home, will offer 
them at $1.75 and the other farmers must meet this price. 
On the other hand, if purchasers are eager to buy, the 
farmers will raise the price. 

Markets were once local, and prices in one place might 
be very different from prices in a town thirty miles away. 
With increased means of transportation markets came to 
serve a larger area, and prices in one place influenced prices 
in a distant market. 

Now most goods are sold in stores, but the same prin- 
ciple holds as in an open-air market. Each store is influ- 
enced by the prices of other stores, and if goods cannot be 

72 



MARKETS, VALUE, AND PRICE 73 

sold at one price they must be reduced in price until they 
can be sold, or if a great demand exists for goods the 
prices may be increased. It is no longer necessary that 
buyers and sellers should come to the same place. They 
-may trade by letter, telephone, telegraph, or cable. 

For some relatively non-perishable articles there is a 
world market. For example, the wheat market is in nor- 
mal times a world market and prices are fixed in Liverpool, 
which has become the great market for the European 
wheat trade. Some countries do not produce enough 
wheat for their own use, while others have wheat to export 
after meeting their own needs. Wheat is graded accord- 
ing to quality, and a trader may buy without ever seeing 
the wheat. The following tables show the countries which 
produce wheat in excess of their own requirements and the 
countries which produce less than they need and must im- 
port. 

PRINCIPAL WHEAT-IMPORTING COUNTRIES 

Country ' Bushels 

Great Britain and Ireland 191,693,300 

Germany 87,357,000 

Belgium 73,422,800 

Netherlands 63,355,100 

Italy 56,302,900 

France 34,169,500 

PRINCIPAL WHEAT-EXPORTING COUNTRIES 

Country Bushels 

Russia ; 148,262,700 

Argentine Republic 96,858,600 

Canada 65,064,500 

United States 53,024,700 

India 40,711,100 

Australia 36,670,700 



74 THE ELEMENTS OF ECONOMICS 

These figures are the average imports and exports per 
year for six years immediately preceding the Great War. 

Demand and Supply. — Demand for an article does not 
mean mere desire. It must be desire accompanied by 
ability to purchase at the market price. Likewise, supply 
does not mean possession of a commodity, but willingness 
to sell at the market price. Demand and supply vary with 
price. For example, if potatoes are five dollars a bushel 
there will be few purchasers, but all persons who have 
more potatoes than they need will be willing to sell. With 
potatoes at fifty cents a bushel there will be more pur- 
chasers and fewer sellers. Thus it is seen that when prices 
are high, demand tends to fall and supply to increase, and 
when prices are low demand tends to increase and supply 
to decrease. With perfect competition there is only one 
price in the same market at the same time, because no 
buyer will pay more than his neighbor and no seller will 
sell for less than others are getting. 

Elastic and Inelastic Demand. — ^Although the demand 
for all economic goods increases as the price decreases, the 
demand for different goods does not vary at the same rate. 
If the demand for a good increases or diminishes rapidly 
with the fall or rise in price, the demand is said to be 
elastic. If a change in price does not very greatly affect 
the demand, it is then said to be an inelastic demand. 
The demand for salt in the United States is inelastic. We 
consume about the same quantity of salt no matter what 
may be the price, though if the price were to rise very 
greatly, economy would be practised and the demand 
would decrease. Elasticity in demand varies in regard to 
the same article in reference to the wealth of purchasers. 



MARKETS, VALUE, AND PRICE 75 

A recent rise in the price of gasoline caused many owners 
of automobiles to restrict their use of gasoline, but it made 
little, if any, difference in the demand of the very wealthy. 
The demand for eggs by people of great wealth is inelastic, 
but the demand of the average person is very elastic. At 
thirty cents a dozen, eggs are eaten for breakfast and are 
a cheap food, but at one dollar a dozen they are little used 
except by the rich. 

The Law of Substitution. — There are few articles for 
which there is no substitute. When the price of any 
article rises, substitutes are used by many people. When 
butter is forty cents a pound and oleomargarine is thirty 
cents, the demand for butter is very great and the demand 
for oleomargarine correspondingly small, but let the price 
of butter rise to eighty cents and the demand is much less 
for it, while the demand for oleomargarine becomes much 
more intense. The falling off in the demand for butter 
tends to decrease its price, while the rise in the demand 
for oleomargarine tends to increase its price. In the same 
way a rise in the price of potatoes causes an increase in 
the demand for rice and macaroni, or a rise in the price of 
wheat causes an increased use of corn and rye. The use 
of substitutes tends to stabilize prices by decreasing the 
demand for the article and increasing the demand for its 
substitute. 

Subjective Value. — There are two senses in which the 
term value is used: Value in use and value in exchange. 
Value in use refers to the satisfaction that may be obtained 
from an article by the individual who uses it, while value 
in exchange refers to what the article will bring if offered 
for sale. Value in use is called subjective value; value in 



76 THE ELEMENTS OF ECONOMICS 

exchange is objective value or market value. The subjec- 
tive value of an article may differ with different persons 
and with the same person at different times. A first 
edition of Adam Smith's Wealth of Nations would be 
highly esteemed by an economist, but to an illiterate man 
it would be only an old book which he might be glad to 
exchange for a bag of tobacco.* A watch, the market value 
of which is $ioo, might be a priceless possession to the owner 
because of association. Even an article which at one time 
may have little subjective value, at another time may be 
qi great subjective value. A glass of water which is or- 
dinarily a free good, might on a wrecked ship have a very 
high subjective value. 

Price is value expressed in terms of money. When an 
article is displayed in a store and is priced at $ioo, a cus- 
tomer may say, ^'It is not worth that to me," which means 
that its value in use to him is less than that of other things 
which the |ioo would purchase. 

Subjective value appears to be far removed from market 
value, but it really is a determining factor in fixing market 
value, as will be seen. 

Market Value when there Are Many Purchasers and 
One Seller. — Let us imagine a case in which a man has an 
automobile for sale and there are many persons who wish 
to buy an automobile, their subjective values differing in 
each case. The seller would take $ioo rather than not 
make a sale, but he does not let that fact be known, natu- 
rally wishing to secure as large a orice as possible. 

*A daily newspaper expressed unconsciously the distinction when it 
remarked: "The hide of a rabbit is not worth two cents on the market 
but it is worth more than a million dollars to the rabbit." 



MARKETS, VALUE, AND PRICE 77 

Seller's Buyers' 

Subjective Value Subjective Values 

$100 ^ $500 

450 
400 

350 
300 
250 

Here we have six persons wishing to purchase, their sub- 
jective valuations in each case differing and each desiring 
to purchase for as Httle as possible, but none being willing 
to pay more than the sum indicated. In an open market 
it is quite apparent that the man who would pay only $250 
would not get the machine, because five persons would bid 
over his valuation. The automobile will sell at a price at 
which the number of buyers and sellers will be the same 
and this will be somewhere between $500 and $450, de- 
pending upon the bargaining ability of the seller and the 
most capable buyer, or the man who would pay $500 rather 
than not get the automobile. 

Market Value when there Are Many Sellers and One 
Buyer. — ^Let us take the reverse of the example given 
above and consider market price when many sellers are 
present and only one buyer. Suppose the buyer will pay 
$400 rather than not secure the automobile and the sellers 
will part with their machines at prices varying from $250 
to $500. 

Buyer's Sellers' 

Subjective Valuation Subjective Valuations 

$400 $250 

300 
350 
400 
450 
500 



78 THE ELEMENTS OF ECONOMICS 

Supposing competition is perfect, the price will not be 
below $250 and will be less than $300, since below $250 no 
sale will take place and at $300 there will be one buyer and 
two sellers. 

Market Value when there Are Many Buyers and 
Many Sellers. — In actual market conditions there are usu- 
ally many buyers and many sellers. Let us suppose there 
are many persons wishing to sell automobiles of the same 
kind and in the same condition and many persons wishing 
to purchase. This is always the case in the market for 
used cars. One man may be willing to sell his car at $800, 
but has no urgent demand for money and will keep it 
rather than accept a smaller sum; another has purchased 
a larger car and though he still has use for his old car will 
sell for $500, and another has lost his interest in automobiles 
because of an accident and will gladly sell for $100, though 
he, and all the others, wants to get as much as he can for 
his automobile. Other sellers have other subjective valua- 
tions. On the other hand, buyers have different intensity 
of desire, though desire alone is no factor in the market. 
It must be desire plus ability to purchase. 

Sellers Buyers 

. $100 $800 

150 750 

200 700 

250 650 

300 600 

350 550 

400 500 

450 450 

5cx> 400 

550 350 

600 300 

650 250 



MARKETS, VALUE, AND PRICE 79 

Sellers Buyers 

$700 $200 

750 150 

800 100 

It is clear that the price will not be $100, for at this 
figure there would be one seller and fifteen buyers, who, 
in a perfect market, will compete to raise the price. At 
$150, there would be two sellers and fourteen buyers, and 
by following out this plan of exclusion, at length we would 
find that at $450 there will be eight buyers and eight 
sellers, and this will be the market price under the condi- 
tions assumed. 

Competition Not Always Perfect. — In the stock exchange 
competition is perfect and there is always the same price 
for the same stock at any one time. Competition is per- 
fect at an auction sale. Sometimes there are different 
prices for the same goods in the same city because of lack 
of knowledge of prices which others are charging. Social 
considerations also cause prices to be higher in one place 
than another. Prices may be higher for the same article 
on Fifth Avenue, Manhattan, than on Fifth Avenue, 
Brooklyn, or on State Street, Chicago, than on Clark 
Street in the same city. 

Market Value of Complementary Goods. — Complemen- 
tary goods are those which are used in connection with 
one another. Shoes are complementary goods; to the 
vast majority of persons one shoe has no value unless 
accompanied by its mate. But some complementary goods 
have value as separate articles and a different value when 
taken together. Thus a span of well-matched horses has 
more than twice the value of either horse considered sepa- 
rately, and a string of perfectly matched pearls has more 



8o THE ELEMENTS OF ECONOMICS 

value than the value of a single pearl multiplied by the 
number of pearls. The value of complementary goods 
usually is considered with the whole as a unit and not one 
of its parts. 

The Market Value of Future Goods. — Many goods are 
not in a condition to satisfy present wants. Iron ore can 
satisfy no present want, but it has a market value because 
it can be made to satisfy a future want. The market 
value of a future good depends upon its demand and sup- 
ply, and the time which must lapse before it can be put in 
shape to supply a want and the expense involved. 

The Relation of Cost of Production to Value. — ^The 
older economists thought that cost of production mea- 
sured value. By cost of production they meant cost of the 
raw material, cost of labor, insurance, taxes, interest on 
investments, a reasonable profit, and other necessary ex- 
penses to put the goods upon the market. It is clear that 
cost of production often fails to explain value, as does cost 
of reproduction. 

A painting by an old master may have a market value 
of $500,000 and this has no relation to the original cost of 
the canvas, the pigments, or the price which the painting 
commanded when first sold. A crate of strawberries may 
be sold on a Saturday night in June for much less than the 
cost of producing them. Other illustrations might be 
given ad infinitum. 

There is, however, a relation between cost of production 
(often called normal value) and market value. In all ex- 
cept monopoly goods * the tendency is for market value to 
coincide with the cost of production of the marginal plant. 

* Monopoly prices are considered in the chapter devoted to monopolies. 



MARKETS, VALUE, AND PRICE 8i 

In goods freely produced (that is, with no monopoly 
features) if prices are above the cost of production, which 
includes a 'reasonable profit, other producers will be at- 
tracted into the business, and, on account of the increased 
supply, prices will fall. Should the price be below the 
cost of production, the least capable producer, or marginal 
producer, will in time be forced out of business, and, be-^ 
cause of the resultant decrease of supply, prices will rise. 

The Marginal Producer. — In the previous paragraph, 
the term ^'marginal producer" was used and this requires 
some additional explanation. Probably no two producers 
of goods ever had exactly the same cost of production at 
the same time. Among the factors that vary are efficiency 
of labor, proximity to raw material, nearness to market, 
managerial ability, economy in the use of coal or water 
power, purchasing ability, selling agencies, insurance, rent, 
and taxes. 

Let us take, for example, the production of crude-oil of 
the highest grade, known as Pennsylvania Crude. The 
wells producing this oil may be a few hundred feet deep or 
may be a few thousand feet deep, the deeper they are the 
more the cost of drilling and up-keep, but the productivity 
does not vary directly or indirectly with the depth. Some 
are near to railroads and the cost of hauling materials is 
comparatively low, others are many miles from the nearest 
railroad and wagon-roads are few and poor. 

These are but two of the more obvious differences in the 
cost of putting down an oil-well. The well that produces 
the most oil may have cost the less, or the reverse may be 
true, or a very expensive well may produce no oil. In the 
long run, however, drilling will not continue in territory 



82 



THE ELEMENTS OF ECONOMICS 



which does not promise to pay at least the cost of pro- 
duction. 

Forty years ago one dollar a barrel was considered a fair 
price for crude-oil; a well producing only a barrel or so a 
day hardly paid the cost of operating, and many small 
wells disadvantageously situated were abandoned. As the 
price of crude oil rose, not only were new wells drilled but 
old ones were again operated after having been abandoned. 
At any one time the marginal well would be the one that 
it just paid to operate at the then current price of crude 
oil. 

The following table will more clearly show the marginal 
well at different times: 

Well No. I can produce oil at a profit at $i a barrel. 



Well No. 2 ' 






<< ( 




2 


Well No. 3 ' 






a i 




3 


Well No. 4 ' 






i( I 




4 


Well No. 5 ' 






a i 




5 


Well No. 6 ' 






a ( 




6 


Well No. 7 ' 






i( i 




7 



When oil is five dollars a barrel, well No. 5 is the marginal 
well. Well No. 6 will not be operated. If demand should 
increase and the price rise to six dollars a barrel, well No. 
6 will then become the marginal well, or if price of oil 
should fall to four dollars, well No. 4 becomes the marginal 
well. 

The Example of Oil Wells a Complicated One. — Many 
plants may be used for several purposes. A building con- 
structed for a blacksmith shop may be turned into a 
garage, or a storage-house or any number of other things. 
An oil-well produces oil or gas, or both, but nothing else. 
It may cost $5,000 to drill a well, and the well may pay 



MARKETS, VALUE, AND PRICE 83 

cost of operating when completed, but may not pay in- 
terest on the $5,000. The well may still be operated if it 
pays enough to make it more profitable to operate it than 
to sell or take to some other place the material that can 
be removed. The cost of drilling will then be charged to 
profit and loss. Whether the well is operated or not, de- 
pends upon the abiHty of the owners to sustain the loss 
involved. All specialized plants, that is, those which can- 
not be used except for one purpose, are like the example 
given, and the marginal plant may not pay all the costs 
of production. Plants below the margin may be operated 
in other industries for a time, with the hope of better re- 
sults or a rise in the market, but in the long run plants 
below the margin must succumb. 

Restatement of the Law of Value. — Market value is 
the value at any one time in a market and it is fixed by 
the interplay of demand and supply. Normal value is 
determined by the cost of production at the marginal 
plant, and, since most goods are made to be sold and not 
for the use of the manufacturers, market value and normal 
value tend to be uniform, though there may be temporary 
fluctuations of market value both below and above the 
cost of production. It should, however, be borne in mind 
that this is not true of monopoly goods, which are con- 
sidered in another chapter. 

Summary. — ^A market is a place where sales are made. 
Markets may be local or general. Increased means of 
transportation tends to make markets general for goods 
which will bear transportation. The price of wheat, corn, 
cotton, and tobacco tends to be fixed by a world demand 
and supply. A shortage of the wheat crop in India or the 



84 THE ELEMENTS OF ECONOMICS 

Argentine Republic influences prices in Liverpool and 
Chicago. For perishable articles the markets are more 
local. The price of strawberries in Detroit may differ 
from the price in Cleveland by more than the cost of trans- 
portation from the one city to the other, if the berries will 
not stand transportation without spoiling. 

Prices in a market are fixed by demand and supply. An 
elastic demand is one which changes rapidly with price; 
an inelastic demand remains about the same regardless of 
price. For most articles there are substitutes and these 
have an important bearing on price. Value in use is value 
to the person who may use the article; value in exchange is 
what the article will bring on the market. Subjective 
value is another term for value in use. Price is value 
expressed in terms of money. Market value depends upon 
supply and demand. Normal valme is measured by the 
cost of production of the marginal producer. 



TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Make a list of articles for which the demand in your com- 

munity is inelastic. 

2. To what extent are substitutes used in your community? 

3. Give some examples of differences in subjective values of the 

same commodity by different persons in your community. 

4. Give some examples of differences in price for the same article 

in your city. 

5. Show the relation between market value and cost of production 

of wheat, clothing, and furniture. 

6. Titian's portrait of Giorgio Cornaro was sold to New York 

dealers in 192 1 for $300,000. This was paid because the 
dealers thought it was worth that much as an investment. 



MARKETS, VALUE, AND PRICE 85 

What would be its subjective value to a person who had 
never heard of Titian? 
A Chinese art collector saw a rare vase in a Brooklyn second- 
hand store and purchased it for five dollars. The next day 
he sold it for $1,800. The subjective value to the second- 
hand dealer was less than five dollars, but to an admirer of 
Chinese vases its subjective value was more than $1,800. 
As a matter of ethics, should the purchaser have informed 
the second-hand dealer concerning the market value of the 
vase? 



CHAPTER IX 
THE ORGANIZATION OF INDUSTRY 

The Entrepreneur. — Land, labor, and capital must work 
together for the production of wealth. In agriculture in 
the United States this co-operation is generally brought 
about by the owner of the land. He hires what labor he 
needs, in addition to that which he himself can supply, 
owns the farm machinery and determines how the land 
shall be used and manages the business. He is landlord, 
capitalist, laborer, and manager. Likewise in small manu- 
facturing plants and retail stores, the organizer of an 
industry not infrequently owns the land and capital and 
supplies part of the labor. In larger business enterprises 
more often the directing of business is given to a special 
class of professional men. These managers of business 
were once called undertakers, but since that term has now 
been assumed by one class of professional men, we usually 
call the manager of business by the French term entre- 
preneur. 

The entrepreneur organizes and directs business, whether 
himself a part owner or not. The entrepreneur is some- 
times called a captain of industry and this is appropriate 
because he commands the industrial forces. The success 
or failure of a business depends chiefly upon him. 

Individual Proprietorship. — The simplest form of busi- 
ness organization is that of a single proprietor who is 
his own entrepreneur. He owns or borrows the capital, 

S6 



THE ORGANIZATION OF INDUSTRY 87 

secures the land, hires the laborers, and manages the busi- 
ness. No formal documents, no organization taxes or 
other preliminaries are required by law in this t3rpe of 
organization. The proprietor is responsible for all debts 
and to him belong all profits. 

For example, should you desire to engage in the grocery 
business, the method of procedure is very simple. Hire a 
suitable store, purchase supplies, and open your shop for 
business. But be sure that you have ability as an entre- 
preneur, because upon this more than anything else de- 
pends success. 

Partnerships. — A partnership is the association of two or 
more persons in a business enterprise. The enterprise in 
this form of organization is owned jointly and each partner 
has equal rights and responsibilities unless otherwise stated 
in the articles of partnership. The terms of partnership, 
such as the sharing of profits and losses, are stated in a 
legal document. In an ordinary partnership each partner 
is liable for a debt contracted by any partner, if it was 
contracted for the benefit of the business. His whole pri- 
vate fortune may be taken to satisfy such a debt, even if 
it was incurred without his knowledge. 

Another serious disadvantage of a partnership is that 
death, or the bankruptcy of a partner, dissolves the part- 
nership. Any dissatisfied partner may also cause a part- 
nership to come to an end. So long as the partnership 
satisfies all, it works well, but a little friction may be fatal. 
It is no wonder that a partnership has long been called "a 
poor sort of ship." 

Limited Partnerships. — To overcome some of the disad- 
vantages of a general partnership, limited partnerships 



8S THE ELEMENTS OF ECONOMICS 

have been created. Under a limited partnership special 
partners are admitted; they have no voice in the manage- 
ment and are not liable for losses in excess of the amount 
they have invested, but receive profits at a rate agreed 
upon. In every limited partnership there must be one or 
more general partners, who are fully liable for debts as in a 
general partnership. 

Corporations. — Intermediate between partnerships and 
modern corporations came the old joint-stock companies. 
Like ordinary partnerships, each member of a joint-stock 
company was liable for all its debts, but ownership in the 
joint-stock company was based upon shares which could 
be sold without bringing the company to dissolution. The 
management of the company was intrusted to a board of 
directors elected by the stockholders. 

The modern corporation is much like the old joint-stock 
company, but unlimited liability for debts has been elim- 
inated and the stockholder is only Hable to the extent of 
his investment.* The stockholders elect a board of direc- 
tors and this board chooses the executive officers of the 
corporation. Stock may be freely sold and the corporation 
may continue in business for an indefinite period. Modern 
business enterprises such as insurance companies, railroad 
corporations, ship companies, steel mills, and others re- 
quiring immense capital would be impossible without this 
form of organization. The number of stockholders in a 
great corporation like the United States Steel Company 

* In most states holders of bank stocks are liable to twice the amount 
of their stock; all the shareholders in national banks are so liable. In 
New York, and a few other states, stockholders are liable for unpaid wages 
of defunct corporations. 



THE ORGANIZATION OF INDUSTRY 89 

reaches hundreds of thousands and thus the small investor 
as well as the large investor may share in the ownership of 
a corporation. 

Without the corporate form of organization, hazardous 
enterprises such as the telephone was once thought to be, 
and as mining and drilling for oil are known to be, would 
hardly be undertaken. Corporations are known to the law 
as ''artificial" persons; they may sue and be sued; may 
inherit property; and may enter suit for slander. 

Corporations are formed under state laws, must pay 
corporation taxes, and must file an annual report with the 
state authorities. 

Despite the very great advantages which belong to the 
corporation as a form of business organization there are 
some disadvantages. Adam Smith, so long ago as 1776, 
observed that the hired managers of corporations were not 
so careful of other people's money as though it were their 
own. This objection is not an important one now. The 
entrepreneur knows that he is responsible for the success 
of a business and his professional pride and self-interest 
cause him to give his best services. 

A more serious objection is voiced in the familiar cry 
that ''corporations have no souls." Under the protection 
of a corporation mask, men have been known to take un- 
fair advantage of their competitors and of the public and 
do many things which as individuals they would shun. 
However, with stricter laws relating to corporations and, 
let us hope, a more enlightened conscience, these evils are 
less in evidence now than they once were. 

Stocks and Bonds. — The capital necessal-y to start a 
business under the corporation plan is usually secured by 



90 THE ELEMENTS OF ECONOMICS 

selling stocks and bonds. There are two kinds of stock: 
common stock and preferred stock. Preferred stock has 
an advantage over common stock in that it has the first 
chance to secure profits. If, for example, a 6-per-cent 
preferred stock be issued, the common stock will receive 
no dividends until 6 per cent has been paid to the owners 
of preferred stock. Preferred stock is usually non-par- 
ticipating, which means that after having received its 
specified percentage, it shall have no further share in the 
profits no matter how large they may be. To make pre- 
ferred stock still more attractive to the investor, it is some- 
times made convertible, which makes it exchangeable for 
common stock at the option of the owner. Common stock 
is sometimes more valuable than preferred stock and the 
reverse is sometimes true; it all depends upon the rate of 
dividends the respective stocks command. It will be seen 
that preferred stock has the stronger appeal to the con- 
servative investor, while the man who is confident of the 
money-making powers of the corporation or is of a specu- 
lative nature will favor the purchase of common stock. 

Oftentimes the organizers of a business wish to secure 
control of the corporation for themselves and they confine 
the voting power to one class of stock, which is called 
voting stock. 

Sometimes a corporation, which is earning larg^ divi- 
dends on its stock, will issue stock dividends. This means 
that additional stock is given to those who already own 
stock without any additional investment on their part. 
Thus if a corporation has issued i,ooo shares of stock 
which has be^ sold for $ioo a share, its capital would be 
$100,000. Should it pay dividends at 20 per cent, the 




< 

H 

o 

o 

H 

CO 





92 THE ELEMENTS OF ECONOMICS 

return would seem large, but a loo-per-cent stock dividend 
would increase its capitalization to $200,000 and its earn- 
ings would now appear to be only 10 per cent. 

Bonds are very different from stocks. Stocks are evi- 
dences of ownership in a corporation, and the owners of 
stocks share in profits. Bonds are evidences of a debt 
owed by a corporation. Bonds are sold in order to secure 
capital, which has no share in management. The bond- 
holder must receive interest on his bonds before anything 
goes to the owners of stocks. If the owners of bonds are 
not paid interest and principal when due, they may enter 
suit before a court of law to place the business in the 
hands of a receiver or to protect their interests in some 
other way. 

Profit-Sharing. — Business enterprises, organized as indi- 
vidual proprietorships, partnerships, or corporations, may 
arrange to admit their employees to a share of the profits. 
Profit-sharing originated in France in the mind of a house 
painter and decorator by the name of Leclaire. The plan 
of sharing profits with his men was first tried in 1843 ^^^ 
met with success from the start. The men of the ''Maison 
Leclaire" found it increased their earnings and Leclaire 
benefited because of the greater interest of the men in 
their work and their attention to economy of time and 
materials. The success of the ''Maison Leclaire" plan led 
to its adoption by other French houses and it soon was 
introduced in the United States. The A. S. Cameron 
Company of Jersey City was the pioneer and the plan was 
successful until the death of Mr. Cameron. 

Profit-sharing has not been an unqualified success. The 
scheme works fairly well where the working men are intelli- 



THE ORGANIZATION OF INDUSTRY 93 

gent and possessed of unusual skill, but it does not appeal 
to the unskilled laborer, and when there are no profits to 
divide the laborers object. However, profit-sharing has 
been remarkably successful in many American plants and 
its advocates are confident of greater success and wider 
application. 

A new plan of profit-sharing was announced in August, 
1920, by the International Harvester Company. This 
corporation intends to distribute $60,000,000 of its stock 
among its 40,000 employees by annual gifts during a period 
of eight or ten years. The gifts of stock each year will 
vary with the profits of the year, and in addition cash 
bonuses will be distributed. The corporation expects to 
profit by the plan. As President McCormick expressed it: 
''This distribution furnishes a distinct incentive to each and 
every employee to do his full share, for upon individual 
effort and team-play will depend in a large measure the 
amount of the annual extra compensation to each em- 
ployee who is entitled to participate." In time the em- 
ployees will own 20 per cent of the stock of the company 
and will have a voice in its management. The United 
States Steel Company has sold considerable stock to its 
employees, but this is not profit-sharing, as it has been 
sold, though on very favorable terms, and not given as a 
share in the profits. 

Welfare Work. — Many corporations do more for their 
employees than pay wages. This service is generally 
known as welfare work. It is necessarily limited, at least 
in its full application, to corporations which are doing a 
large and prosperous business. Welfare work includes part 
or all of the following: 



94 THE ELEMENTS OF ECONOMICS 

1. Medical Work. — This includes medical examination, 
rest-rooms, washing and bathing facilities, home nursing, 
optical and dental care. 

2. Savings and Insurance. — This covers msurance 
against sickness, old age, and accidents. 

3. Profit-Sharing. — Whereby the laborer shares in the 
profits. Usually 8 per cent goes to the owner before labor 
receives any share and then laborers share in proportion to 
wages and term of service. 

4. Recreation. — Clubs, entertainments, dances, and 
concerts. 

5. Education. — ^Training for jobs and training in jobs. 
Training in citizenship, etc. 

6. Care Outside of Working Hours. — ^Housing of em- 
ployees. Recreation and care of families. 

Co-operation as a Method of Production. — Co-operation 
is a form of business organization whereby the working 
men supply the capital and manage the industry. It has 
met with considerable success in England, Belgium, and 
other European countries, especially in co-operative stores. 
In the United States co-operative stores have succeeded in 
some places and have failed elsewhere, depending for 
success or failure upon the skill with which they have 
been managed and upon local conditions. Co-operation in 
manufacturing enterprises has not been very successful in 
the United States. Skill in management is not possessed 
by many, and the man who has such skill can demand and 
receive a large remuneration. Men who start co-operative 
manufacturing plants are usually unwilling to pay for the 
best talent and they seldom possess it themselves. 

Co-operative creameries and cheese factories have been 



THE ORGANIZATION OF INDUSTRY 95 

very successful, but they are not co-operative in the real 
meaning of the term. A group of farmers builds the 
creamery and hires a man to run it. The farmers share in 
the earnings, but do not work in the plant. The farmers 
are really capitalists, and that they take milk to the plant 
in no way changes their status. 

Industrial Democracy. — The plan of giving employees a 
voice in factory management was adopted in England as 
a reconstruction policy after the Great War, but its most 
extensive application has been in Belgium.* 

In the United States, recently, a number of industrial 
plants have adopted the plan and this includes some of- the 
largest in the country, such as the Standard Oil Company 
of New Jersey and the Goodyear Tire & Rubber Company 
of Akron, Ohio. 

The method is not uniform. In a number of plants, 
joint committees, composed of equal numbers of em- 
ployees, have charge of all matters pertaining to employ- 
ment, working conditions, hours of labor, safety and 
accidents, etc.; profit-sharing is also usually included. In 
other plants an organization somewhat similar to that of 
the United States Government is followed: There is a 
Cabinet consisting of the executive officers of the com- 
pany; a Senate composed of heads of departments and 
foremen; and a House of Representatives elected by the 
employees. 

It has been found that labor representation tends to give 
the laborer a greater interest in his work and in the plant 
as a whole; helps him to overcome the sense of isolation; 

* See "Industrial Councils in Belgium," by Henry de Man, The Survey, 
July 3, 1920. 



96 THE ELEMENTS OF ECONOMICS 

makes it possible to adjust matters of difference without 
resorting to strikes and lockouts; increases production and 
lessens waste and the labor turn-over. 

Mr. Paul W. Litchfield, factory manager of the Good- 
year Tire & Rubber Company, bears testimony as to its 
success in that factory and to the spirit of co-operation 
that has resulted. '^ Nearly every decision has been unani- 
mous, and where there have been differences of opinion, in 
each case parts of both groups were voting the same way." * 
Not only has labor representation worked well with highly 
skilled labor, but Mr. John Leitch, in his valuable work, 
Man to Man, shows how it has been as great a success in 
plants where it might reasonably be thought there would 
be little chance of success. 

At the Industrial Conference of 191 9, called by the 
President of the United States, it was found ''That joint 
organization of management and employees, where under- 
taken with sincerity and good- will, has a record of success." 
The report of the conference further states ''Employee 
representation must not be considered solely as a device 
for settling grievances. It can find success only if it 
also embodies co-operation in the problem of production. 
Whatever subjects the representatives come to feel as 
having a relation to their work, and their effectiveness as 
members of the plant, may come within the field of com- 
mittee consideration. 

"It must be undertaken, if at all, in a thoroughgoing 
way. Representatives must be selected by the employees 
with absolute freedom. In order to prevent suspicion on 

* Litchfield, The Industrial Republic, pp. 91, 92. See Appendix for the 
Goodyear plan. 



THE ORGANIZATION OF INDUSTRY 97 

any side, selection should be by secret ballot. There must 
be equal freedom of expression thereafter. All employees 
must feel absolutely convinced that the management will 
not discriminate against them in any way because of any 
activities in connection with shop committees. Meetings 
should be held frequently and regularly, not merely when 
specific disputes are threatened. Both sides must be pre- 
pared to study the problems presented and must give 
them patient, serious, and open-minded consideration." 

No plan of this kind can succeed unless the representa- 
tives of capital are prepared to give a ''square deal" to 
labor and unless labor is willing to give a fair day's work 
for a fair day's pay. 

''The idea of employee representation has aroused oppo- 
sition from two sources: On the one hand, in plants too 
large for direct personal contact, employers who still ad- 
here to the theory that labor is a commodity, hold off from 
any co-operation with employees. This view is steadily 
disappearing and will, it is to be hoped, wholly disappear. 
On the other hand, a number of trade-union leaders regard 
shop representation as a subtle weapon directed against 
the union. This theory is apparently based on the fear 
that it may be used by some employers to undermine the 
unions. Conceived in that spirit no plan can be a lasting 
agency of industrial peace." * 

The Relation of the State to Industry. — In many coun- 
tries the government directly engages in industry. In 
most European countries the telephone-lines, the tele- 
graph, the railroads, and many other forms of industry are 
owned and operated by the State. The United States 

* Report of the Industrial Conference, p. 10. 



98 THE ELEMENTS OF ECONOMICS 

conducts the postal business. Most American cities sup- 
ply water to their inhabitants, while some own and operate 
electric light and gas plants. 

The question of extending or contracting the sphere of 
government participation in industry is one of the leading 
questions of our time, which will be discussed in a subse- 
quent chapter. 

Indirectly the State is a partner in all production of 
wealth. Among the services which it renders may be men- 
tioned the following: 

1. It provides courts whereby contracts may be en- 
forced. There could be no production of wealth in the mod- 
ern sense without assurance that agreements will be kept. 

2. It regulates the holding, transfer, and bequest of 
property. 

3. It provides a system of currency, a standard of 
weights and measures, builds and repairs roads, bridges, 
lighthouses, makes rules of navigation, etc. 

4. It protects persons and property from violence both 
by internal and external foes. 

5. It provides agencies to extinguish fires, to protect 
the public from the peril of floods. 

6. It maintains agencies to keep the people informed 
concerning weather conditions, trade opportunities in other 
countries, crop conditions, methods of fighting insects 
and fungus, etc. 

7. It constructs irrigation works, improves rivers and 
harbors, etc. 

8. It cares for the public health by creating agencies to 
prevent the spread of contagious diseases and by providing 
means for the care of those who are ill. 



THE ORGANIZATION OF INDUSTRY 99 

Summary. — Business may be conducted in many ways. 
There may be a single proprietor, a partnership, or a 
corporation. Most business in towns and cities is done 
by corporations. Farming is chiefly managed by a single 
proprietor. Each form of organization has its advantages 
and disadvantages. Stocks are evidences of ownership in 
corporations. Bonds are claims against a corporation. 
Profit-sharing is the admission of employees to a share in 
the profits. Co-operation is the management of a busi- 
ness by the working men. Its weakness is that it gener- 
ally dispenses with the services of an entrepreneur. The 
giving of workmen a share in the management of business 
may be secured by a shop committee, chosen by the em- 
ployees. This brings about a degree of democracy in 
industry. The State is an important participant in all 
industry. Without it there could be little production of 
wealth. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Why are drug stores almost universally organized as corpora- 

tions? Is there any reason why more drug stores are cor- 
porations than grocery stores? 

2. What welfare work is done by corporations in your city ? How 

do the employees regard it? 

3. Make an investigation of profit-sharing in your city. 

4. Give an account of any plants in your city in whose manage- 

ment the laborers have a share. 

5. What lines of business activity are undertaken by your city? 

Does the city do this work well? What improvements in 
its methods can you suggest? 

6. The post-offices of the larger cities are conducted at a profit to 

the national government, but in many parts of the country 



loo THE ELEMENTS OF ECONOMICS 

the postal service is managed at a loss. Show why it is 
socially desirable that the postal service be maintained even 
at a loss? Why may it be economically desirable? 

7. Local dealers often complain that mail-order houses hurt local 

trade. They say that local dealers pay taxes and are en- 
titled to local patronage. Give your opinion of their 
arguments. 

8. Show some services which the government renders to indus- 

try not mentioned in the text. 



CHAPTER X 

THE PRINCIPAL AMERICAN INDUSTRIES— HUNTING, 
FISHING, MINING, AND LUMBERING 

There are economic and uneconomic ways of securing a 
living. The person who makes a living by an economic 
method renders some service to the community. This ser- 
vice may be the production of some material thing or the 
rendering of some personal service. Unfortunately some 
people render no economic service but live at the expense 
of others. In this latter class belong loafers, thieves, 
gamblers, and swindlers of all kinds. They are an injury 
to the economic life of a people not only because they 
render no service but because they prey upon those who 
are rendering a service. Though small in number they are 
a direct and an indirect expense to every community. 

Classification of Economic Industries. — Industries may 
be classified as follows: 

1. Those which make available elementary utility. 
Such industries are hunting, fishing, lumbering, mining, 
agriculture, and cattle-raising. 

2. Those which produce form, place, and time utility. 
Such industries are those engaged in manufacturing, trans- 
portation, storing, and merchandising. 

3. Those rendering personal services. To this class 
belong the services rendered by physicians, teachers, 
clerks, servants. 

lOI 



I02 THE ELEMENTS OF ECONOMICS 

4. Risk-takers. To this class belong all those engaged 
in any line of insurance. 

Extractive and Genetic Industries. — ^An industry which 
reduces the amount of material furnished by nature, with- 
out any replacement, is called an extractive industry; an 
industry which replaces any loss, or increases the supply, 
is a genetic industry. Mining is an extractive industry. 
Lumbering is extractive, but forest culture is genetic. 
Hunting is extractive, as is also fishing, at least in inland 
lakes and rivers, but cattle-raising, poultry-raising, and 
fish culture are genetic. The future of industry depends 
upon economy in using materials that cannot be replaced 
and in extending the genetic industries. 

Hunting. — ^Hunting was the first employment of man. 
His chief want was to secure food and he took the direct 
method of getting it. Hunting included searching for 
nuts, fruits, and edible plants as well as for animals. Able 
to overtake few animals and unequal in strength to most 
of the larger animals, the lot of primitive man was a hard 
one. He hunted for food and was hunted by strong and 
fierce animals. His brain alone made him superior to 
other animals. Unless his brain had been superior, he 
would have been exterminated. The unknown benefactor 
who invented the bow and arrow gave man supremacy 
over the beasts. This invention, some historians think, has 
surpassed any other in its services to mankind. 

The American Indians before the time of Columbus lived 
chiefly by hunting and fishing, though they already had a 
crude knowledge of agriculture. The early colonists were 
mighty hunters and the demand for furs for Europe made 
the fur trade very important. Great fur-trading com- 



THE PRINCIPAL AMERICAN INDUSTRIES 103 

panics, of which the Hudson's Bay Company was the 
most important, played a very great part in the history of 
America. 

Hunting requires a large area to support a small popu- 
lation, and as the population increases the animals are 
driven farther and farther away. Hence the business of 
hunting has gradually come to an end in the more densely 
populated parts of the country and hunting here is only a 
pastime, the average hunter spending more in securing 
game than it is worth on the market. Much of the game 
has entirely disappeared. The bison which roamed the 
plains is no more. The passenger-pigeons, whose flights 
darkened the skies so late as 1876 are gone forever. The 
water fowl and deer are few where once they were many. 
Though much of this destruction was without adequate 
excuse, it should be remembered that a better animal than 
the bison has taken its place. The bison and the great 
herds of cattle now on the plains could not both be there 
at the same time. Domesticated animals are more de- 
pendable than wild ones. Domesticated fowls produce 
more eggs and their flesh is more palatable than the flesh 
of wild fowls. Domestic sheep and swine are in all respects 
superior to their wild ancestors. 

There is still considerable trapping of small animals such 
as foxes, musk-rats, and raccoons, and the value of the furs 
so obtained is considerable in the aggregate, but it is only 
a fraction of what it once was. 

Fishing. — Fishing is also a very ancient method of 
getting food. It doubtless requires more skill than hunt- 
ing, but the returns to primitive man were uncertain. The 
fisheries of America were important in colonial times and 



I04 THE ELEMENTS OF ECONOMICS 

are still valuable. Fishing is both a business and a pastime 
in the United States. Many streams and lakes have been 
*' fished out," but they may be restocked, unless their 
waters have been hopelessly defiled by the pernicious habit 
of dumping sewage and other refuse into them. Even 
the Great Lakes may lose their value as producers of fish 
unless scientific methods of keeping up the supply are 
employed. Lake Ontario was once a great producer of 
whitefish, but its supply of whitefish was practically ex- 
hausted as long as forty years ago, and only recently are 
these valuable fish again appearing in its waters. Both 
the United States Bureau of Fisheries and state hatcheries 
are engaged in restocking our lakes and rivers. During 
the year ending June 30, 1918, the former distributed 
4,098,105,158 eggs, fry, fingerlings, yearlings, and adults.- 

The oceans afford an apparently inexhaustible supply of 
many varieties of edible fish. Doubtless many fish that 
are not now used for food can be so used. The dogfish, for 
example, is usually rejected, but properly prepared it is 
the equal in all respects of many more highly esteemed 
fish. 

The salmon fisheries of Alaska are the most valuable of 
any of the American fisheries, and the canned Alaska 
salmon is sold in every village in the country. The total 
value of Alaska fish taken in the year 191 7 was $51,466,- 
980, most of which was salmon. The fisheries produce 
much fertilizer as well as food, as fish are rich in phos- 
phates. The last census gave the number of persons en- 
gaged in the fishing industry as 166,343. 

Mining. — Coal is the leading mineral product of the 
United States. Though coal is mined in many states. 



THE PRINCIPAL AMERICAN INDUSTRIES 105 

Pennsylvania leads all in coal production. The demand 
for coal has steadily increased and with it has come in- 
creased production. 

COAL FJIODUCTION IN THE UNITED STATES 




Tons of Bituminous 


Tons of Anthracite 


189,567,957 


51,221,353 


281,306,058 


69,339,152 


372,420,663 


75,433,246 


395,200,380 


79,459,876 


492,670,146 


88,939,117 



Only about 5 per cent of the coal mined in the United 
States is exported in normal years and our imports are 
also small. Notwithstanding increased production, prices 
of both anthracite and bituminous coal have advanced 



MILLIONS OF LONG TOT^S 
5^0 100 150 200 250 300 350 400 450 500 550 600 




COAL PRODUCTION OF THE UNITED STATES 

steadily since 1913. The demand for coal for both indus- 
trial and domestic purposes has grown and during the war 
there was an extraordinary demand. The return to nor- 
mal conditions will probably not reduce prices much, if 



io6 



THE ELEMENTS OF ECONOMICS 



any, as wages and transportation charges will hardly be 
lowered, and every year sees more of the easily worked 
veins exhausted, which means recourse must be had to 
deeper veins and poorer mines. Natural gas, extensively 
used in many parts of the United States, is being rapidly 
exhausted. There is no reason to doubt that long before 
the coal supply approaches exhaustion, cheaper and better 
means of securing heat, light, and power will be found. 
Water-power, now that it can be converted into electric 
power, is once more approaching the importance it pos- 
sessed before the general use of steam-power, and it prom- 
ises to grow in importance. The utilization of the power 
of the winds, the immense power exerted by the tides, as 
well as the now unharnessed power of hundreds of rivers, 
will in time furnish all the light, heat, and power needed 
and at a moderate price. 

Not less important than coal is the iron ore of the United 
States. Indeed coal and iron are the pillars upon which 
the manufacturing industries of the country rest. Iron 
has been produced from native ores from the colonial 
period. The building of railroads during the decade 1830- 



MILLIONS OF LONG TONS 
5 10 15 20 25 30 35 46 45 $0 55 60 65 70 75 80 



1870 
1880 
1890 
1900 
1910 
1917 



§ 



PRODUCTION OF IRON ORE IN THE UNITED STATES 



THE PRINCIPAL AMERICAN INDUSTRIES 107 

1840 both increased the demand for iron and made avail- 
able new supplies. For many years Pennsylvania led all 
states in production of iron ore, but the opening of the 
Lake Superior ore region caused Michigan to take the lead. 
The Michigan ore is easily worked and is loaded from open 
pits by steam-shovels directly into the cars, which carry it 
to the bunkers at the loading stations on the Lakes, from 
which it sHdes down chutes into the holds of the ships. 
The Lake Superior region furnishes considerably more than 
half of all the iron ore used in the United States. Ala- 
bama and Pennsylvania produce large quantities of iron 
ore. The output of iron ore has risen from 16,000,000 tons 
in 1890 to over 75,000,000 tons in 191 8. 

Copper-mining began in the Lake Superior region about 
1850 and by 1866 had reached a production of 8,000 tons. 
Since then it has enormously increased, and the rich mines 
of Montana have made that state a most important copper- 
producing region. The output in the United States for 
1917 was 842,018 tons. 

Gold became an important product by 1853, when the 
value of the gold mined amounted to $889,000. By 1855 
it had increased to $55,000,000; since then its production 
has fluctuated very much. In 191 7 there was produced 
in the United States over $83,000,000 worth of gold. 

Space does not permit discussion of other mineral prod- 
ucts, except that its great and growing importance re- 
quires some note must be made of petroleum production. 

Though petroleum was long known to exist in Pennsyl- 
vania and was collected from surface outcropping and sold 
as a medicine under the name of "Seneca Oil," the first well 
was not drilled until the famous Drake well in 1859. The 



io8 THE ELEMENTS OF ECONOMICS 

production of oil in 1859 was 2,000 barrels, which sold at 
twenty-nine dollars a barrel. The market was not able to 
absorb the large production of the next few years which 
rose to 3,000,000 barrels in 1862, when the price fell to 
ten cents a barrel at the well. The building of pipe-lines 
improved transportation, and improvements in refining and 
better lamps gave a steady demand and prices rose to re- 
munerative figures. 

Until the invention of the internal-combustion engine 
gasoline was of little importance and was often a waste 
product. In the last decade the demand for gasoline has 
been tremendous and gasoline is now more valuable than 
kerosene. Increased demand for crude-oil for fuel pur- 
poses and for oil for the manufacture of gas, as well as the 
demand for lubricating-oils and gasoHne has caused doubt 
as to whether the wells could continue to furnish an ade- 
quate supply. The Great War was ''a gasoline war," and 
most of the great nations of the world are now looking for 
supplies of their own wherever indications show that oil may 
exist. In the meantime, the wells of the United States are 
producing increased supplies, but the price has steadily risen, 
as the demand has increased more rapidly than the supply. 

In 191 7 the total production of crude-oil in the United 
States was 335,315,601 barrels, valued at $522,635,213. 
Pennsylvania, which long led in petroleum production, is 
now surpassed in that respect by Oklahoma, California, 
Kansas, Texas, Illinois, Louisiana, and West Virginia, 
in the order given. Production in Pennsylvania, includ- 
ing contiguous territory in New York, declined from 
28,458,208 barrels in 1890 to 8,612,885 barrels in 191 7, and 
this despite an increased price for oil and its stimulating 




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no THE ELEMENTS OF ECONOMICS 

effect on drilling. There is little hope that petroleum 
production can keep up with demand. Increased supplies 
may come from the shales of Colorado and new fields may 
be opened, but old fields are sure to decrease in produc- 
tivity. The only secure hope for the future lies in econ- 
omy chiefly through the invention of a more efficient 
internal-combustion engine and in the discovery of sub- 
stitutes for gasoline. Alcohol, which can be produced in 
abundance from vegetables, grain, and fruit, seems to 
promise best as a substitute. 

Lumbering. — The early colonists found the entire eastern 
part of what is now the United States covered with a dense 
growth of timber. They had no need to economize in the 
use of wood as there was plenty and to spare. In many 
parts of the country the trees were regarded as an encum- 
brance and were cut and burned, or girdled and let die 
in order to make room for agriculture. 



Relation between, forest iepl^tion and 
forest growth ( in billions of cubic feet) 

i 26. o \ 

„_____^_^ Cut and Destyuctiorv ^nnuallu 
I 6.0 I ^ 

Cy-oioih o^nnually 

SOFT WO ODS 

1 14.0 1 

J Cut and De struct ion 

I 3.5 I 

GfO'Wth 

HARD W OODS 

,- Cut and Destruction 

Croioth 



FROM "TIMBER DEPLETION, LUMBER PRICES," ETC. 



112 THE ELEMENTS OF ECONOMICS 

Much of the timber that has survived until our time is 
in places remote from settlements, or where the soil is so 
poor as to make it not worth while to remove the trees. 
A considerable trade in lumber existed in colonial times. 
As early as 1652 there was a sawmill in Virginia ^' built 
at a cost of forty-eight beaver skins." The first sawmill 
in New England was in operation at Dorchester in 1628. 
Dutch colonists built many mills along the Hudson valley. 
The first settlers in Maine and New Hampshire were lum- 
bermen. 

Lumber for export consisted of materials for ships, such 
as masts and spars, staves, shingles, hoops, and boards. 

As the trees became scarce in one locality, the lumbering 
industry steadily pushed its way into more remote places. 
Unfortunately forest culture, the genetic side of the indus- 
try, has not kept step with forest destruction. 

^Xess than 5 per cent of the virgin forests of New Eng- 
land remain, and the total stand of saw timber in these 
states is not more than one-eighth of the original stand. 
New York, once the leading state in lumber production, 
now manufactures only 30 board feet per capita yearly, 
although the requirements of its own population are close 
to 300 board feet per capita. The present cut of lumber 
in Pennsylvania is less than the amount consumed in the 
Pittsburgh district alone. The original pine forests of the 
Lake States, estimated at 350,000,000,000 feet, are now 
reduced to less than 8,000,000,000 feet, and their yearly 
cut of timber is less than one-eighth of what it used to be. 
These four densely populated regions, containing them- 
selves very large areas of forest land, are now largely de- 
pendent upon timber grown and manufactured elsewhere 



THE PRINCIPAL AMERICAN INDUSTRIES 113 

and are becoming increasingly dependent upon timber 
which must be shipped the width of the continent. 

'^The bulk of the building lumber and structural timbers 
used in the Eastern and Central States during the last 
fifteen years was grown in the pine forests of the South. 
The virgin pine forests of the South Atlantic and Gulf 
States have been reduced from about 650,000,000,000 
board feet to about 139,000,000,000 feet. The production 
of yellow-pine lumber is now falling off and within ten 
years will probably not exceed the requirements of the 
Southern States themselves. 

^' The United States at one time contained the most ex- 
tensive temperate zone hardwood forests in the world. 
One region after another has been cut out. The pro- 
duction of hardwood products on the past scale cannot be 
long continued. The scarcity of high-grade oak, poplar, 
ash, hickory, walnut, and other standard woods is now 
placing many American industries in a critical condition. 

''The depletion of forest resources is not confined to saw 
timber. Since 1909, the country has ceased being self-sup- 
porting in newsprint paper and now imports two- thirds of 
the pulp, pulp wood, or newsprint which we require. This 
condition is due in part to timber depletion, in part to fail- 
ure of the paper industry to expand in our Western forest 
regions as the lumber industry has expanded. In 1919 the 
production of turpentine and rosin had fallen off 50 per cent. 
Within ten years the United States will lose its commanding 
position in the world's market for these products and may 
in time be unable to supply its domestic requirements." * 

* " Timber Depletion, Lumber Prices, Lumber Exports and Concentra- 
tion of Timber Ownership." Report on Senate Resolution 311. Govern- 
ment Printing OflSce, 1920. 



114 



THE ELEMENTS OF ECONOMICS 



Timber Depletion and Prices. — Prices, both whole- 
sale and retail, have increased as the supply has dimin- 
ished. It will be seen from the following table, that 
increased prices of transportation have been an important 
factor in retail prices. The table is for prices in southern 
Minnesota and the increased prices are partly due to the 
increased amount of Western lumber which was imported 
in order to supply needs which a few years ago were amply 
supplied by neighboring forests. 

Prices throughout the United States have risen to about 
the same extent as in Minnesota. The prices are generally 
conceded to be unreasonably high, and they have partly 
been caused by the bidding up to the present figures by 



RETAIL PRICES OF LUMBER 



Vears 



Average Retail 
Selling Price 



Per 

Thousand 



Per Cent 
Increase 



Average Transpor- 
tation Cost 



Per 

Thousand 



Per Cent 
Increase 



Portion of Average 

Retail Selling Price 

Absorbed by 

Transportation 



Per Cent 



Per Cent 
Increase 



1905 
1906 
1907 
1908 
1909 
1910 
1911 
1912 

1913 
1914 

1915 
1916 
1917 
1918 
1919 



^26 
31 
34 
31 
30 
31 
31 
30 
32 
31 
30 
31 
3S 
46 

54 



03 
68 

64 
85 
43 
71 
17 
75 
28 

83 
44 
43 
58 
51 
42 



0.0 
21 .6 

33-0 
22.3 
16.9 
21.8 
19.6 
18. 1 

23-9 
22. 2 
16.9 
20.7 
48.0 
78.6 
109.0 



7 
8 

10 
II 



25 
25 
00 
00 

50 

75 
75 
75 
75 
00 

50 
50 
00 

75 
75 



0.0 
30.8 
23.0 
23.0 

38.5 

46.0 

46.0 

77.0 

107.8 

146.0 

161. 5 

130-5 
146.0 
231.0 
262 .0 



12 

13 
II 

12 
14 
15 
15 
18 
20 
25 
27 
23 
20 

23 
21 



0.0 

7.2 

8.0 

0.8 

17.6 

20.0 

21 .6 

49-6, 

67. 2 

100.8 

132.2 

91 . 2 

66.4 

84.8 

72.8 



ii6 THE ELEMENTS OF ECONOMICS 

buyers themselves. ''It is a little too much strain on 
human nature to expect that producers shall refuse to 
accept the highest prices offered for their goods." 

The depletion of timber in the United States, in the 
opinion of the experts of the Forest Service, has not re- 
sulted from the use of our forests, but from their devas- 
tation, caused by forest-fires and by methods of cutting 
which destroy or prevent new timber growth. It is said 
that the enormous area of forest land in the United States, 
much of it unsuited to other uses, would provide an ample 
supply of wood, if it were kept productive. 

The Forest Service of the United States has done much 
to preserve the forests which belong to the nation and to 
increase the area of forest lands by setting out millions of 
young trees. In 19 19 there were about 160 national for- 
ests, with a total area of 162,000,000 acres. The forests 
belonging to the nation are not merely preserved, but are 
made useful. The trees which are matured are cut and 
the timber marketed, but as a new crop is always growing, 
the forests are not destroyed. 

Summary. — There are two ways of securing a living: 
one is economic and the other is uneconomic. Every per- 
son who helps to produce some useful object or who renders 
some helpful service is making a living by an economic 
method. 

The economic industries are either extractive or genetic. 
Hunting, fishing, lumbering, and mining are extractive 
industries. Stock-raising, fish culture, agriculture, and 
forestry are genetic. 

Hunting is the most ancient method of getting food and 
clothing. It can be the principal industry only when 



THE PRINCIPAL AMERICAN INDUSTRIES 117 

population is sparse. Hunting is now chiefly a pastime 
in the United States, but it was once an important indus- 
try. Fishing is both a pastime and an industry. The 
supply of game and fish may be increased by making it 
illegal to hunt or fish during certain periods of the year 
and by stocking woodlands and streams. 

Mining is an extractive industry. Economy in the use 
of products of the mines is necessary. There is no genetic 
side to the mining industry. 

Forestry is the genetic side of lumbering. As a result of 
a campaign of education conducted by the Boone and 
Crockett Club, of which Theodore Roosevelt was a leading 
member, Congress in 1891 passed the Forestry Reserve Act. 
Under this act Presidents Harrison, Cleveland, and Mc- 
Kinley reserved 35,000,000 acres of forest lands. The 
greatest advance in forestry was made in President Roose- 
velt's administrations. In 1898 Mr. Gifford Pinchot be- 
came chief of the Division of Forestry, which was attached 
to the General Land Office of the Department of the 
Interior. In 1901 the Division of Forestry became the 
Bureau of Forestry, and in 1905 Congress made it the 
Forest Service. The duties of the Forest Service include 
protection of the forest lands from fire and from lumber 
thieves. The Forest Service has made a study of forestry 
problems and has promoted forestry on private and State 
lands as well as upon the national domain. Through the 
work of the Forest Service not only is the supply of tim- 
ber conserved, but the watersheds are protected. When 
all trees are removed there is ''low water or no water at 
all during the long dry periods, and destructive floods 
after heavy rains." The floods wash the top-soil into the 



ii8 THE ELEMENTS OF ECONOMICS 

rivers, with the double injury of depriving the land of 
much of its most fertile elements and filling up the bot- 
toms of the rivers. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What are the chief industries of your city? Of your state? 

2. Have there been any changes in the kinds of industry followed 

in your community during the last fifty years? What are 
the reasons for these changes? 

3. Are there any people in your state who make a living by hunt- 

ing or fishing ? How does their number compare with those 
so engaged fifty years ago ? Why ? 

4. Find the prices of coal and building materials ten years ago and 

compare them with present prices. What has caused the 
change? What do you think prices will be ten years from 
now? 

5. What has been done by your state in the line of conservation 

of its natural resources? How may an individual aid in 
conservation of resources? 

6. How may organizations such as the Boy Scouts and the Girl 

Scouts render services to the community in protecting 
forests ? 

7. What advantage to a community are the song-birds? How 

may birds be attracted to a community? What are the 
chief enemies of birds? How may birds be protected from 
their enemies? 



CHAPTER XI 

THE PRINCIPAL INDUSTRIES OF THE UNITED STATES- 
STOCK-RAISING AND AGRICULTURE 

Stock-Raising. — Every animal, except the turkey, now 
domesticated, had reached that condition in unknown 
antiquity. The same instinct that leads a boy to take 
home a wild rabbit and try to tame it operated in ancient 
times. Wild animals were at first probably tamed as 
companions rather than for economic purposes. 

Ever since the beginning of recorded history domestic 
animals have been of economic service to man. Domestic 
animals have not only been valuable in furnishing materials 
for food and clothing, but they have furnished power for 
transportation and machinery. Horses are still the chief 
rehance of farmers for ploughing, harrowing, and other 
farm operations, though power suppKed by internal- 
combustion engines will soon be doing a large part of farm 
work. 

In the United States cattle and sheep raising, as the 
chief industry, has gradually moved westward as agricul- 
ture has claimed the land. Most of the cattle are now 
raised in states west of the Mississippi and on lands not 
well adapted to agriculture, though they are often fattened 
in the states of the ''corn belt.'* The cattle ranges have 
diminished in the West and with the loss of the best feed- 
ing-grounds the price of cattle has steadily increased. 

The raising of live stock is the principal industry in 

119 



I20 THE ELEMENTS OF ECONOMICS 

the semi-arid districts of Colorado, Montana, Texas, and 
Wyoming. The United States leads all nations in extent 
and value of live stock. 

Quite distinct from the cattle-raising industry is the 
dairying industry. It flourishes in most parts of the 
TJnited States, especially in the "corn belt," though New 
York leads all states in the quantity and value of dairy 
products. Easy and rapid transportation to city markets 
is a most important consideration in reference to milk, the 
greatest dairy product. 

Agriculture. — An advance of vast importance was made 
when men first undertook to raise cereals and plants. Not 
only was the supply largely increased, but better varieties 
were produced by removing competition of other plants, 
preparing the soil, and by saving the best of the crop for 
seed. A larger population became possible and the in- 
stitution of private property in land arose. 

Agriculture, until comparatively recent times, was 
merely scratching the surface of the ground and cultiva- 
tion was of the crudest kind. By experience it was 
learned that certain soils were better than others, and 
that the same crops could not be grown year after year 
upon the same piece of ground, and rotation of crops was 
introduced as well as fertilization of the soil. 

Agriculture is now and always has been the most im- 
portant single industry in the United States, both in the 
value of products and the number of persons employed. 
Indian corn, or maize, was extensively grown by the early 
settlers. It required little cultivation and would grow 
well upon new soil. Maize has always been the greatest 
of our cereal crops, and is now grown in every state of the 
Union, but most extensively in the ''corn belt," comprising 



INDUSTRIES OF THE UNITED STATES 



121 



Illinois, Iowa, Kansas, Missouri, and parts of Indiana and 
Nebraska. 

Corn is chiefly used as a food for live stock, though in- 
creasing quantities are being used for human consumption 
in the form of corn-meal, corn syrups, and salad-oils. 



MILLIONS OF BUSHELS 
1000 1500 2000 



2500 



3000 




CORN PRODUCTION OF THE UNITED STATES 

The following table, compiled from the Reports of the 
Department of Agriculture, gives some idea of the size 
and value of the corn production of our country. 



Year 


Area 


Production 


Farm Value 
December i 


Farm 
Value 

per 
Bushel 


Yield 
per 

Acre 


1900. . . 
1905 . . . 
1910. . . 
1915. .. 
1916. . . 
1917. . . 
1918. . . 


Acres 
83,320,872 
. 94,011,869 
. 104,035,000 
106,197,000 
. 105,296,000 
. 116,730,000 
• 107,494,000 


Bushels 
2,105,102,516 
2,707,993,540 
2,886,260,000 
2,994,793,000 
2,566,927,000 
3,065,233,000 
2,582,814,000 


Dollars 
751,229,034 
1,116,696,738 
1,384,817,000 
1,722,680,000 
2,280,729,000 
3,920,228,000 
3,528,313,000 


Cents 

35- 7 
41.2 

43 -o 

57 -5 

88.9 

127.9 

136.0 


Bush 

25 
28 

27 
28 
24 
26 
24 


els 

3 
8 

7 
2 

4 

3 




Though not equal in quantity or value to the corn crop, 
wheat is the next most important cereal crop of the United 
States. Wheat is grown in every state, but the great 



122 



THE ELEMENTS OF ECONOMICS 



wheat states are Minnesota, the Dakotas, Kansas, and 
Nebraska. Unlike corn, of which we export comparatively 
small quantities, wheat is one of the large export crops of 
the United States. In the year 19 13, there was exported 
from the United States 19.57 P^'* cent of the domestic crop. 



MILLIONS OF BUSHELS 

300 400 500 600 



700 800 900 




WHEAT PRODUCTION OF THE UNITED STATES 

During the Great War the percentage of wheat exported 
reached abnormal figures, being 37.31 per cent in 191 5; 
23.70 per cent in 1916; 31.99 per cent in 1917. 



WHEAT PRODUCTION AND VALUE 

Compiled from Reports of the Department of Agriculture 



Year 


Area 


Production 


Farm Value 
December i 


Farm 
Value 

per 
Bushel 


Yield 
per 
Acre 


1900. . . 
1905. . . 
1910. . . 

1915- • • 
1916. . . . 
1917. . . 
1918 


Acres 
42,495,385 

47,854,079 
45,681,000 
60,469,000 
52,316,000 
45,089,000 
59,110,000 


Bushels 

522,229,505 

692,979,489 
635,121,000 
1,025,801,000 
636,318,000 
636,655,000 
917,100,000 


Dollars 

323,515,177 

518,372,727 

561,051,000 

942,303,000 

1,019,968,000 

1,278,112,000 

1,874,623,000 


Cents 
61 .9 

74.8 

88.3 

91.9 

160.3 

200.8 

204.4 


Bushels 
12.3 

14-5 
139 
17.0 
12. 2 
14. 1 
15-5 



124 



THE ELEMENTS OF ECONOMICS 



Hay is the largest single crop produced in the United 
States. The total amount of hay and forage crops cannot 
be given, as large quantities are consumed by cattle in 
pastures, but the crop of 19 18, after pasturage had 
been finished was 75,459,000 short tons, valued at $1,522,- 
473,000. 

The great staple, cotton, was grown in the South before 
the Revolutionary War, but the invention of the cotton- 

MILLIONS OF Five HUNDRED POUND BALES 
1 2 3 4 5 6 7 8 9- 10 11 12 




I i II 

COTTON PRODUCTION OF THE UNITED STATES 



gin in 1792 by Eli Whitney caused cotton to become the 
most important crop of the southern tier of states. Be- 
fore Whitney's invention seeds were removed from the 
cotton by hand or by a roller-mill. A slave could clean 
five pounds per day by hand, or sixty-five by the mill. 
The cotton-gin enabled a slave to clean 300 pounds per 
day and with improvement in the gin the amount was 
soon increased. 

At first most of the cotton was exported to England, but 
with the growth of the textile factories in New England, 
and later in the South, the domestic consumption of cotton 
increased and in 1918 only 40.58 per cent of the cotton 




From a photograph by Publishers Photo Service 

HARVESTING 




From a photograph by Brown Brothers 
PLOUGHING BY A GANG-PLOUGH PULLED BY A TRACTOR 

Machinery in use on a Western farm 



JL26 THE ELEMENTS OF ECONOMICS 

crop was exported. The production of cotton for the year 
ending July 31, 19 18, was 11,302,000 bales of 500 pounds 
each. Chiefly on account of conditions brought about by 
the war, the value of the crop of 1918 was more than twice 
the average value for recent years. 

Tobacco has been an important crop in many sections 
of the country since its early settlement, but unlike cotton, 
tobacco may be grown in the North, and Connecticut and 
Wisconsin are among the states producing considerable 
quantities of tobacco. Kentucky produced 427,500,000 
pounds out of a total crop for 1918 of 1,340,019,000 pounds. 
North Carohna and Virginia are next in tobacco production. 
Tobacco is most exhausting to the soil and heavy fertiliza- 
tion or resort to new lands is necessary for its successful 
growth. 

Sugar-cane has been grown in several southern states, 
but only in Louisiana has it become of any great impor- 
tance. From Louisiana cane there were produced in the 
year ending March, 1919, 546,862,400 pounds of sugar. 
The States of California, Colorado, Idaho, Michigan, Ohio, 
and Utah produced most of the sugar-beets, from which, 
in the year ending March 31, 1919, 1,510,128,000 pounds 
of sugar were made. In the year ending June 30, 1918, 
Porto Rico sent 672,937,334 pounds of sugar to the United 
States, and Hawaii sent 1,080,908,797 pounds. 

Americans are among the greatest of sugar consumers, 
averaging about 80 pounds a year per capita; 51 per cent 
of the sugar consumed in 1918 was imported from foreign 
countries. 

Intensive and Extensive Cultivation. — Where land is 
expensive as compared to labor and fertilizers, it pays to 



INDUSTRIES OF THE UNITED STATES 127 

invest a large amount per acre in labor and fertilizers. 
This is known as intensive agriculture. In Europe inten- 
sive agriculture is the rule. The market gardens near the 
large American cities also are examples of intensive agri- 
culture. In America there is a larger use of machinery 
than in Europe, because labor here is expensive as com- 
pared with machinery. 

Where land is cheap and labor and fertilizers are ex- 
pensive, it pays better to spread an investment of capital 
and labor over a large area of land; this is extensive agri- 
culture. 

Whether extensive or intensive agriculture is employed 
depends wholly upon the comparative expense of land, 
labor, and capital. Though the wheat lands of the Red 
River Valley of North Dakota are not surpassed in fer- 
tility by any wheat lands in the world, a small amount 
of labor and capital is expended per acre and as a re- 
sult land much inferior in Europe yields a larger crop 
per acre than the Dakota lands. However, the cost per 
bushel is less in North Dakota than in any European 
country. 

The Law of Diminishing Returns in Agriculture. — ^With 
additional investments of labor and capital upon a given 
area of land, the point will be reached when returns will 
not be proportionate with the increased investments. For 
a time there will be increased returns, untU the point of 
maximum return is reached and then returns diminish in 
proportion to the investment, and it pays better to take 
up another piece of land than to cultivate more extensively 
the old. The following example in the production of 
potatoes illustrates the law of diminishing returns. 



128 THE ELEMENTS OF ECONOMICS 



Units of Invest- 






ment of Labor 






and Capital per 




Return per unit of Labor 


Acre 


Returns per Acre 


and Capital 


I 


( 75 bushels 


75 


2 


Increasing ! i8o " 
returns 325 " 


90 


3 


108.33 


4 


1 450 " 


112. 5 


5 


Diminishing / 525 " 


105 


6 


returns \ 600 " 


100 



V Knowledge of scientific agriculture makes it possible to 
raise increased crops on a given area of land, but, as every 
farmer knows, the point comes when additional invest- 
ment per acre does not pay. 

The law of diminishing returns may also be proved by 
showing the absurdity of the contrary. For, if the law of 
diminishing returns were not true, enough potatoes to feed 
the whole world could be produced from a single acre of land 
by simply increasing the expenditure of labor and capital. 

The Marginal Product of Labor and Capital. — In agri- 
culture, as in all production of wealth, the farmer has the 
option of combining labor and capital as he thinks most 
advantageous. If labor is expensive, he will try to sub- 
stitute machinery for part of the labor. The point which 
he must consider is whether additional labor earns its 
wages and whether additional machinery pays interest on 
the investment and provides for its renewal when worn 
out. If able, the farmer will continue to employ additional 
labor, until the point is reached when the laborer only pro- 
duces enough to pay his wages. The laborer who just 
produces enough to pay his wages is called "the marginal 
laborer"; he is not necessarily the last laborer employed, 
but any laborer when the investment of labor, land, and 
capital has reached a certain point. 




From a photograph by Brown Brothers 



"i>-ttii>I-*'«« 



•-*i."A«irl- ^^ w-*"*^-ir«'* :r li^yr 















Frow a photograph by Publishers Photo Service 

FARM LANDS IN NEW ENGLAND AND MONTANA 

In New England the machinery used on a Western farm could not be employed. 
Do you wonder that wheat is produced cheaper in the West? 



I30 THE ELEMENTS OF ECONOMICS 

In the same way he will invest capital, if he can, until 
the point is reached when it just returns enough to make 
it pay; this point is that of the "marginal productivity" 
of capital. 

Scientific Agriculture. — No business requires greater 
knowledge than that of farming. A farmer, in order to 
make the most of his calling, must be something of a 
mechanic; must know much concerning the care of ani- 
mals; must have some knowledge of such matters as the 
chemistry of the soil, fertilizers and their uses, rotation of 
crops, modes of fighting insects, fungus, and other pests; 
must be able to keep accounts and to attend to buying and 
marketing. 

Scientific agriculture is that method of agriculture that 
enables the farmer to make the best use of his opportunities. 
The teaching of agriculture in schools and colleges and the 
published reports of the United States Department of 
Agriculture and state experiment stations, have done 
much to raise the standard of agriculture in the United 
States. 

Urban and Country Population. — The table on next page 
shows the increase in the urban population of the United 
States since 1790, the year of the first census. 

Decline in Rural Population. — The relative decline in 
the rural population is partly explained by the fact that 
every labor-saving device suitable to agriculture diminishes 
the amount of labor necessary on the farm and increases 
the demand for labor in the city factories. Likewise all 
improvements in transportation tend to hurt business in 
the small villages by making it easy to get supplies from 
the cities. 



INDUSTRIES OF THE UNITED STATES 



131 



Census Years 



1920. 
1910. 
1900. 
1890. 
1880. 
1870. 
i860. 
1850. 
1840. 
1830. 
1820. 
1810. 
1800. 
1790. 



Total 
Population 



105,683 
91,972 

75,994 
62,622 

50,15s 

38,558 

31,443 

23,191 

17,069 

12,866 

9,638 

7,239 

5,308 

3,929 



,108 
,266 

,575 
,250 
,783 
-371 
,321 
,876 

,453 
,020 

,453 
,881 

,483 
,214 



Urban 
Population" 



54,816,209 

42,623,383 

30,797,185 

18,272,503 

11,318,547 

8,071,875 

5,072,256 

2,897,586 

1,453,994 
864,509 

475,135 
356,920 
210,873 
131,472 



Numbef 
of Places 



2,405 
1,894 

447 

286 

226 

141 

85 

44 

26 

13 

II 

6 

6 



Per cent of 

Urban of 

Total Popu 

lation 



51 
46 
40 

29 

22 

20 

16 

12 

8 

6 

4 

4 

4 

3 



* Population of places of 8,000 inhabitants or more at each census, 
except for 1920, 1910, and 1900, in which cases all places over 2,500 are 
included. 



During the Great War the opportunities for employ- 
ment at high wages in the cities drained the country of 
much of its agricultural labor. It is true that the lure of 
the city attracted many, but the economic argument 
doubtless had the most influence. The end of the war 
saw a return of many agricultural laborers to the country, 
but the scarcity of labor continues to be one of the great 
difficulties of American farmers. 

The eight-hour day is less common on farms than in 
factories. During harvest season twelve hours usually 
constitute a day's work and ten hours in the winter. But 
there are compensations. The employer and the employee 
usually work together and a better understanding exists 
between them than in factory work. The work is chiefly 



132 THE. ELEMENTS OF ECONOMICS 

out of doors and is not onerous for a man of good physical 
powers. It is probably true that ten or twelve hours in 
farm labor is not more exhausting than eight hours in a 
factory. 

Size of Farms. — In the United States most farms are 
small. There are many large farms, but the average farm 
in 1 910 was 138 acres, while in 1850 it was 202 acres. As 
intensive farming becomes more common, the size of the 
average farm may be expected to decline. 

The United States census authorities regard a ^'farm" 
as all the land which is directly farmed by one person, 
either by his own labor alone or with the assistance of 
members of his household or hired employees. When a 
landholder has one or more tenants, renters, croppers, or 
managers, the land operated by each is considered a 
"farm." In 1900 the number of farms in the United 
States was 5,737,372. In 1910 the number had increased 
to 6,361,502, an increase of 10.9 per cent during the decade. 
By 1920 the number had reached 6,449,998, but the in- 
crease during the last decade was only 1.4 per cent. 

Marketing of Farm Products. — The difference between 
the price of agricultural products at the farm and in the 
city retail markets has been a matter of comment for many 
years. As this chapter is being written, potatoes may be 
purchased from farmers in Suffolk County, Long Island, 
for $1.50 a bushel, while they are selling in Brooklyn, only 
sixty miles away, at $3.50 a bushel; the best green corn 
costs twenty-five cents a dozen at the farm in Suffolk 
County and sells at retail in Brooklyn at sixty cents. 
The usual method of marketing most farm products is to 
consign them to a commission merchant, who sells them 



INDUSTRIES OF THE UNITED STATES 133 

for the farmer on commission, or else the farmer takes 
them by truck to a wholesale market and sells directly to 
retail dealers. 

The farmers have frequently complained that the com- 
mission men do not give them an honest price for their 
goods. Most commission men are honest and the farmer 
can be protected from the dishonest dealer. Laws pro- 
viding for the licensing and regulating of commission 
business have been passed in many states and these pro- 
vide for revoking of licenses in case of offenses such as 
the following: making charges for services not rendered; 
misrepresenting the condition of goods when received; 
misrepresenting prices or market conditions; failure to 
make prompt payments; or combining to corner the 
market. Where such laws are properly enforced, there is 
little cause to complain of the actions of commission 
merchants. 

It is often claimed that the retail dealer is a profiteer. 
The differences between wholesale and retail prices of farm 
products are frequently great, but it must be remembered 
that farm products are perishable and the retail dealer is 
a risk-taker. 

In some cities, like Baltimore, Washington, and Indian- 
apolis, there are large retail markets maintained by the 
city in which stalls are rented to farmers and others at 
reasonable rates, and as a result direct contact is made 
between producer and consumer to the benefit of each. 

Co-operative marketing by associations of farmers, like 
the California Fruit Growers and Shippers Association, 
which sells its products directly to dealers, has benefited 
the producer, but has not served to lower retail prices. 



134 THE ELEMENTS OF ECONOMICS 

Summary. — Hunting has given place in the United 
States to stock-raising. Better animals can be grown 
when domesticated than are produced when they are wild. 
Cattle-raising, except for dairying, is now chiefly confined 
to the semi-arid districts of Colorado, Montana, Texas, 
Wyoming, and parts of neighboring states. Agriculture is 
still the leading industry of the United States. Our chief 
crops are corn, wheat, hay, cotton, and tobacco. Inten- 
sive farming is the investment of a large amount of capital 
and labor upon a certain area of land. Extensive agricul- 
ture is the spreading of investments of capital and labor 
over a large area. Intensive farming is the rule where 
land is expensive; extensive agriculture is the rule where 
land is cheap. In the truck-gardens near our large cities 
there are large investments in fertilizers and labor; every 
foot of the soil is cultivated. It is too valuable to be left 
idle. In the wheat-fields of North Dakota there is small 
investment of capital and labor to the acre. No one com- 
plains if a person walks through a wheat-field, and the 
harvesters do not bother to cut every corner clean. 

Farming in the United States is done chiefly by the 
men who own the farms. Though there are some great 
farms covering thousands of acres, like the Dalrymple 
Farm of North Dakota, most farms are less than 150 acres 
in size. 

The most serious problem of the American farmer has 
been to secure labor. This is because farm laborers have 
been attracted to the city, partly by the belief that city 
life is more enjoyable and partly because of higher wages. 
It is doubtful whether city life has the expected advantages. 
The farm laborer has many advantages which the city does 



INDUSTRIES OF THE UNITED STATES 135 

not give and the purchasing power of a small money wage 
in the country may be as large as that of the higher money 
wage in the city. No business demands a greater exercise 
of the meiital powers of a man than successful farming. 

Farm products are generally sent to commission agents 
who sell them to wholesale or retail dealers. Farmers 
sometimes complain that commission agents do not deal 
fairly with them, but perhaps the farmers do not under- 
stand the problems of the commission merchants. Direct 
dealing between farmers and consumers of farm products 
may be maintained through the parcel-post or by city 
markets to which the farmer may bring his goods and sell 
them direct to the consumer. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Have you ever tried to domesticate a wild animal? With 

what success? What were the causes for your success or 
failure ? 

2. What are the chief agricultural products of your state? Have 

the agricultural products of your state changed in recent 
years? Whence comes the wheat used in your city? 

3. Would you prefer to work in a factory or on a farm? Why? 

Have you had any experience in either kind of work? If 
so, how did you like it ? 

4. Do you think agricultural products cost too much in your 

city? How much of the price goes to the farmer? How 
much to the commission merchant ? How much to the 
retailer ? 

5. 'a Michigan grower of peaches sent 500 baskets of peaches to 

Chicago. The farmer received one dollar a bushel for his 

, peaches, but thought he should have received more because 

the best peaches were selling in Chicago at two dollars a 



136 THE ELEMENTS OF ECONOMICS 

basket retail. Show that his complaint may not have been 
justified. 

6. How are farm products pcmrketed in your city? Show how 

marketing of farm products might be improved. 

7. A New York citizen drove his automobile to Suffolk County, 

Long Island, and brought home a load of peaches for which 
he paid $1.25 a basket. The trip consumed a whole day 
and cost him ten gallons of gasoline and a quart of oil, to 
say nothing of the wear and tear on his car. He found that 
peaches of the same quality were selling in New York at 
$2.75 a basket. Did he save anything by his journey if he 
^Drought home ten bushels? Was the difference in price on 
the farm and at the retail market too great? What were 
ihe expenses from the farm to the city purchaser? 



1 



CHAPTER XII 
MANUFACTURING 

The Industrial Revolution. — In the latter part of the 
eighteenth century, a series of epoch-making inventions 
brought about the Industrial Revolution. 

The more important of these inventions affected the 
manufacture of cloth. Cotton goods had been made by 
the weavers in their homes. The yarns were carded and 
spun by hand, usually by the wife and unmarried daugh- 
ters. Spinning was so much the ordinary occupation of 
an unmarried daughter that the word spinster designated 
an unmarried daughter. 

The story goes that as a poor weaver, James Hargreaves 
by name, entered his hoXise one day, his wife accidentally 
dropped her spindle. The spindle, in an upright position, 
continued to revolve with the thread still spinning in the 
wife's hand. To Hargreaves the idea was suggested of 
connecting a number of spindles with one wheel. The 
machine which Hargreaves completed was named in honor 
of his wife, a Spinning- Jenny. The spinning-jenny soon 
came into general use, though not without protest from 
many people who thought that by its use they would be 
thrown out of work. 

The yarn spun by the jenny was not suitable to be used 
as warp, which is the name given to the threads which run 
the long way of the fabric. Hence woolen and linen 
threads had to be used. Richard Arkwright in 1771 in- 

137 



138 THE ELEMENTS OF ECONOMICS 

vented a process of passing the thread over two pairs of 
rollers, one revolving much faster than the other. His in- 
vention received the name of water-frame, from the fact 
that the mill in which it was first used was run by water- 
power. In the years from 1774-79 Samuel Crompton 
produced a machine which combined the inventions of 
Arkwright and Hargreaves. This machine was called a 
mule, because of ''its nature" we are told. 

The invention of the steam-engine by James Watt in 
1769 gave the power necessary to run machinery better 
than the water and horse power which had previously been 
used. These inventions first were applied to the manu- 
facture of cotton, but later affected all textile industries. 
The use of machinery in the textile industries was followed 
by its introduction in other lines of manufacture. 

The Factory System. — ^With the use of expensive ma- 
chinery and steam-power, industries were transferred from 
homes and from small shops to large factories. This 
brought about the separation between laborers and capital- 
ists and the general use of the wages system. The word 
"manufacturer" in Adam Smith's Wealth of Nations, re- 
ferred to a man who made things with his hands {manus 
and facio), or, as we would say, a laborer. ''Manufac- 
turer," after the industrial revolution, received its modern 
meaning. The immense increase in production of goods 
brought about competition in a larger market. There 
were no laws regulating hours or conditions of labor, as 
the current thought and practice favored a laissez-faire, 
or let-alone policy. According to this theory everything, 
if let alone, would adjust itself properly. If one employer 
of labor was unfair, it was supposed that laborers would 



MANUFACTURING 139 

desert him. Hence he would discover that unfairness did 
not pay. If a man cheated, his deception would be found 
out and he would be shunned by other men. 

Slowly England learned the fallacy of a laissez-faire 
policy and successive acts were passed to protect labor 
against excessive hours, unsanitary conditions, accidents, 
and other defects of the factory system. 

The Extension of the Factory System to America. — 
Parliament desiring to secure for England the benefit of 
the great inventions prohibited the export of any ma- 
chinery, tools, plans, or models under severe penalties. 
Americans were able, however, to introduce the spinning- 
jenny into this country in 1775. 

The first complete cotton factory was operated in 1789 
by Samuel Slater at Pawtucket, Rhode Island. Although 
Slater, called by Jackson '' the father of American manu- 
facturers," could not import any machinery or plans from 
England, he was able to reproduce from memory the most 
important machinery. The War of 181 2 helped manufac- 
turing in the United States, as the people had to make the 
things they wanted or go without them. After the war 
was over, manufacturing lagged in the United States and 
the factory system was not fully estabHshed until 1840. 
Albert Gallatin attributed the slow growth of manufac- 
tures in the United States to (i) the greater profit to be 
obtained from agriculture, (2) the abundance of land, 
(3) the scarcity of capital, (4) the high price of labor. 

The Factory System Still Being Extended. — The sub- 
stitution of factory-made goods for those of home pro- 
duction has continued to the present time. Not long 
ago canned fruits and vegetables were prepared at home; 



I40 THE ELEMENTS OF ECONOMICS 

now they are chiefly factory products. The same may 
be said of bread, cakes, and pies. Clothing for men and 
women is now chiefly factory made, but men who are still 
young can remember when these articles were the products 
of home labor. 

Tendency toward Production on a Large Scale. — There 
are several reasons to-day for large factories. Industries 
such as the making of pianos, automobiles, watches, and 
shoes, the slaughtering of animals for food, and the pack- 
ing of meat, show a tendency for the large factories to 
become larger and the small factories to disappear. This 
does not necessarily mean monopoly, as the large factories 
still compete with one another. Some of the advantages 
of production on a large scale are the following: 

1. Greater economy in the use of capital. Machinery 
in a large factory may be kept busy all the time, while in 
a small factory the output is not large enough fully to 
employ the specialized machinery all the time. 

2. There may be a greater division of labor, particularly 
among the more specialized lines of labor. A large plant 
can hire a skilful chemist, engineer, or superintendent. 

3. There can be economy in the purchase of raw ma- 
terials in large quantities and at regular intervals. 

4. In the making of by-products a large factory can 
use much of what a small factory would waste. The 
great packing-houses produce many by-products such as 
fertilizers, glue, ammonia, leather, and pepsin. 

5. A large establishment may secure its source of raw 
material, may have its own steamships and wharfs, may 
make its own barrels or other containers, and have its own 
storage plants. 



MANUFACTURING 141 

Advantages of the Small Producer. — ^However, the ad- 
vantages are not all with the large producer. The follow- 
ing are some of the advantages of the producer on a small 
scale : 

1. The proprietor who manages his own establishment 
has an inducement to economy and hard work, which the 
hired manager does not have. Against competition of 
powerful establishments, many small plants operated by 
their proprietors flourish. 

2. In some industries the greatest efficiency of plant 
may be obtained in a small factory. Any further increase 
in size is mere duplication. 

3. Electric power may be had by the small producer. 
This tends to overcome the advantage of generating power 
on a large scale by the larger plant. 

4. Waste materials may be sold to those who specialize 
in their use, thus overcoming the advantage which the 
large producer has in making by-products. 

Machinery and Labor. — On looking at a piece of ma- 
chinery which will enable one man to do the work formerly 
done by ten men, the observer may jump at the conclusion 
that nine men have lost their jobs. This is far from the 
truth. The immediate effect of labor-saving machinery is 
to replace labor by machinery, but the ultimate effect upon 
labor is different. The lowering of the cost of production 
results in lower prices and an increased demand, which is 
generally followed by a larger number of men being em- 
ployed in the industry, not to speak of the men employed 
in making the machines. For example: The introduction 
of type-setting machines was resisted by the men employed 
in the printing trade. At first a large number of men were 



142 THE ELEMENTS OF ECONOMICS 

thrown out of employment, but newspapers and books 
were so reduced in price that an increased demand led to 
an increased amount of work. Now many thousands of 
men are employed in the printing trades whose labor 
would not be in demand were it not for the type-setting 
machines. Likewise, the locomotive displaced the stage- 
driver, but the railroads have vastly increased the demand 
for transportation and have therefore increased the de- 
mand for labor. 

The fallacy which has just been explained is sometimes 
called the *'lump of labor fallacy." It assumes that there 
is, at any time, a certain amount of work to be done and 
that, if labor-saving machinery is introduced, a certain 
number of laborers will lose their jobs. The fact is that 
there is an indefinite amount of work to be done and 
whether or not the work is done depends upon cost and 
demand for the product. 

Without doubt the conditions of labor have improved 
through labor-saving devices. An engineer, operating a 
locomotive, has an employment more remunerative and 
more pleasant than the stage-driver and one that employs 
his intellect to a larger degree. The man who operates a 
lathe, or almost any other machine, has a better job than 
the hand laborer who formerly worked in a similar industry. 

The Law of Diminishing Returns in Manufacturing. — 
We have previously explained the law of diminishing re- 
turns in agriculture. It was once thought that the law of 
diminishing returns did not apply to manufacturing. This 
is a mistake. It must not be forgotten that the law of 
diminishing returns does not refer to industry as a whole 
but on a given area of land. The amount of labor and 






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144 THE ELEMENTS OF ECONOMICS 

capital which may be employed on an acre of land in 
manufacturing is very great as compared with that which 
can be employed in agriculture and the point of diminish- 
ing returns is, therefore, reached more slowly in manufac- 
turing. But the point of diminishing returns comes in 
manufacturing. It does not pay to build factories be- 
yond a certain height nor to crowd them with machinery 
beyond a certain degree. When the maximum employ- 
ment of capital and labor consistent with economy of 
production has been reached on a given area of land, it 
becomes desirable and necessary to buy new land and 
put up new buildings, rather than enlarge old buildings or 
crowd them more. 

In mining the expense increases rapidly with the in- 
creased depth of the mine. The higher an elevator is run, 
the more rapidly the expense of instalment and operation 
increases. The last knot that is obtained from a fast 
steamboat costs more than any other knot. The law of 
diminishing returns has a universal application, but the 
point of diminishing returns is reached sooner in some in- 
dustries than in others. 

Summary. — The industrial revolution gave rise to the 
factory system. The policy of laissez-faire, or non-inter- 
ference, was at first followed in England, but was aban- 
doned in the first half of the nineteenth century. The 
factory system was introduced into America before the 
close of the eighteenth century, but was not fully estab- 
lished until about 1840. The substitution of factory-made 
goods for goods of home production has not ceased. There 
are several reasons why to-day there are large factories. 
Among these are: (i) Greater economy in the use of capi- 
tal, (2) a greater division of labor, (3) economy in the 



MANUFACTURING 145 

making of by-products, (4) the large factory may control 
the source of its raw material and other supplies. How- 
ever, the advantages are not all in favor of the large pro- 
ducers. A small factory may have the following advan- 
tages: (i) Personal interest of the proprietor, (2) in many 
industries as great an efficiency of plant as the large pro- 
ducer, (3) electric power tends to aid the small producer, 
(4) waste material may be sold to those who specialize in 
its use. Machinery has been a benefit to laborers and to 
the whole population. The law of diminishing returns 
applies to manufacturing, but a much larger investment 
on a given area of land may be made than in agriculture. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Show the immediate effects of the industrial revolution in 

England. References: Beard, The Industrial Revolution; 
Toynbee, The Industrial Revolution; Ely, Outlines of Eco- 
nomics, pp. 51-56; Shapiro, Modern and Contemporary Eu- 
rope, pp. 49-52- 

2. Give an account of the rise of the factory system in America. 

References: Coman, Industrial History of the United States, 
pp. 180-193; Bogart, Economic History of the United States, 
chap. XI; Taussig, Tariff History of the United States, 
pp. 17-67. 

3. What factory-made articles used in your own home were home- 

made a few years ago? What electric appliances are now- 
used in homes? 

4. What small factories are there in your community ? How long 

have they been in existence? What advantages do they 
possess ? 

5. Visit some factory and make a report on use of machinery in 

the factory. 



CHAPTER XIII 
TRANSPORTATION 

In the United States we have seen three stages in the 
development of transportation: (i) The turnpike; (2) 
canal and river; (3) railroad. 

The Turnpike Period. — In colonial times roads were few 
and local. The first long-distance roads were constructed 
during the last decade of the eighteenth century. These 
long-distance roads were built by private companies, usu- 
ally aided by public funds, and tolls were charged for their 
use. They were called turnpikes, from the bar that closed 
the road and was turned to let a wagon pass after the toll 
had been paid. The cost of transportation by turnpike 
was very high. It cost about. 33 per cent of the value to 
send goods from Philadelphia to Kentucky. The average 
expense for transportation of goods by turnpike was ten 
dollars a ton for every 100 miles. In his famous report of 
1807, Gallatin recommended that the Federal Government 
build roads and canals. Considerable money was thus 
expended by the government, notwithstanding objections 
raised to this use of Federal funds on account of its alle^^ed 
unconstitutionality. State governments also aided in road 
construction and the principal cities of the United States 
were connected by roads as early as 1840. 

The Revival of Long-Distance Roads. — After railroads 
were built, wagon-roads were used only for short-distance 
hauls and state and national aid ceased. To-day there is 

146 




From a photograph by Ewing Galloway 

MITCHELL POINT ON THE COLUMBIA RIVER HIGHWAY 

The Columbia River Highway here runs under a sheer cliff. A fine example 
of a modern long-distance road 



143 THE ELEMENTS OF ECONOMICS 

a new interest in long-distance roads on account of the 
automobile. All the states and the Federal authorities 
are now giving attention to road-building. Good roads 
bring pleasure to thousands and result in better prices for 
the farmers and lower prices and better service for city 
consumers of farm products. 

Canal-Building. — While the building of turnpikes was 
under way, another method of transportation was receiving 
attention. Canals cost more to build, but when once 
built goods can be sent by canal much cheaper than by 
road. A mule can draw more goods loaded in a canal-boat 
than twenty horses can haul in a wagon. The people of 
the United States knew the advantages of canals over 
roads and gave their attention to the construction of 
canals as soon as their resources permitted. Though sev- 
eral canals had been constructed before the Erie Canal, 
this was the first great success in canal-building. It con- 
nected the Hudson River with Lake Erie and was com- 
pleted in 1825. Its success was immediate. Freight rates 
were lowered, time of transit was shortened, and new dis- 
tricts were opened to trade. In addition to this it was 
profitable to its builder, the State of New York, and paid 
for itself in ten years. The Erie Canal continued to pro- 
duce a revenue for the State of New York until the com- 
petition of railroads took away most of its patronage. It 
is still in operation, having recently been converted into a 
barge canal. Though the Erie Canal now produces no 
revenue it still has an influence in keeping down the cost 
of transportation in New York State, and would prove 
invaluable if for any cause transportation by rail were 
interrupted. 



TRANSPORTATION 149 

Other states followed New York. Pennsylvania com- 
pleted an extensive canal system in 1834. The Ohio 
Canal, built by the State of Ohio, connected Lake Erie 
and the Ohio River. Massachusetts, New Jersey, and 
Virginia were among the states that led in canal-building. 
The states built canals directly by appropriating money 
and loaned their credit to private canal companies. 

The immediate result was favorable to all sections of 
the country. The farmers in the West were able to send 
their goods to Eastern markets and receive better prices 
than had prevailed in their local markets. They also pur- 
chased farm machinery for less than they had formerly 
paid. The cities of the Eastern states also profited by 
lower prices for flour and an enlarged market for their 
manufactured goods. 

Most of the canals were not successful financially, owing 
to the competition of railroads. When the railroads made 
the canals unprofitable most canals were sold to railroad 
companies or abandoned. 

Railroads. — Railroads have become the chief means of 
transporting goods over long distances in the United 
States. No country in the world has so many miles of 
railroads as America. It is difficult to believe that the 
grandfathers of many men still active in business never 
saw a railroad. 

The Baltimore and Ohio Railroad, the pioneer in Amer- 
ica, opened a few miles of road in 1830. Horse-power and 
sails were tried as motive power, but after a year and a 
half of experience with these, steam-power was adopted. 
The first locomotives were imported from England, but 
proved unsuited to American rails and road-beds, and 



I50 THE ELEMENTS OF ECONOMICS 

American engineers soon designed engines better suited to 
American conditions. 

Railroad-building proceeded rapidly after 1840. Soon 
every Eastern city of much importance had railroad con- 
nection with other cities, and by 1850 railroads had pene- 
trated west of the Allegheny Mountains. The railroads in 
1850 were local roads. Frequent changes of cars were 
necessary in order to travel long distances. 

The decade from 1850 to i860 was characterized by 
great activity in railroad-building. By the end of this 
decade there were 28,919 miles of railroad in operation. 
Local lines were beginning to be linked together. For 
example, several local lines between Albany and Buffalo 
were united to form the New York Central Railroad. This 
resulted in greater economy of operation and greater con- 
venience to travellers. 

The Civil War brought a stop to railroad construction. 
After the war railroad construction was revived and soon 
the states east of the Mississippi had a network of rail- 
roads connecting all important cities. Railroads to the 
Pacific coast were planned while the Civil War was being 
waged. No private company was willing to begin the 
work without government aid and Congress voted to give 
large grants of land and to loan millions of dollars. The 
Union Pacific Railroad, extending from Omaha to Ogden, 
was granted 12,000,000 acres of public land. The Central 
Pacific, reaching from Ogden to Sacramento, received 
8,000,000 acres. Grants to other railroads brought the 
total land grants by the Federal Government to 159,000,- 
000 acres before land grants were discontinued in 187 1. 

On May 10, 1869, the Union Pacific and the Central 




HH " 



152 THE ELEMENTS OF ECONOMICS 

Pacific Railroads were joined at Promontory Point near 
Ogden. It now was possible to travel by rail from New 
York to California. 

Railroad Competition. — Soon after the Civil War most 
of the short railroads were linked together. Competition 
became intense between rival lines. The theory of the 
time was that competition should be encouraged. ^'Cut- 
throat competition" led to the weaker lines being forced 
to sell out to the stronger. The New York Legislature, 
like legislative bodies in other states, tried to prevent 
consoHdation of rival lines by passing a law making such 
an act illegal. When the West Shore Railroad was beaten 
in a war of rates by the New York Central, it was leased 
to the latter railroad for a period of -999 years. 

Where consolidation was not feasible ''pooling" agree- 
ments were made. Under their terms business and profits 
were divided and the same rates charged by each line. 
Competition in rates ceased. 

Railroad Abuses. — Under unrestricted private ownership 
a number of abuses developed. The most serious was dis- 
crimination in regard to persons and places. Favored 
shippers were given special advantages in assignment of 
cars and special rates. The regular rate was usually col- 
lected from a favored shipper and then a part returned 
to him. This was called a rebate. Passes were freely 
granted to favored persons and denied to others. Dis- 
crimination against places was no less common. The 
granting of lower rates to some places than were given to 
others was a great advantage to the favored communities. 

Public Regulation of Railroads. — In 1887 was passed the 
Interstate Commerce Act. Its object was to compel the 



TRANSPORTATION 153 

railroads to treat all alike. All discrimination was pro- 
hibited. The Interstate Commerce Commission, created 
by the act, has had its power increased by supplementary 
legislation and now has fairly complete control over the 
railroads. 

Most of the states have commissions of their own with 
control over commerce within the state. Sometimes the 
state commissions have acted contrary to sound economic 
policy and have hindered rather than helped the railroads. 

Mr. Alfred P. Thorn, in an address* before the State Bar 
Association of Tennessee, showed some of the faults of the 
state commissions: 

"Three states have passed laws making it illegal for a 
carrier having repair shops in the state to send any of its 
equipment, which it is possible to repair there, out of the 
state for repairs in another state; fifteen states have 
attempted to secure preferred treatment of their state 
traffic, either by heavy penalties for delays or by prescrib- 
ing a minimum movement of fifty miles per day — one of 
these States imposing a fine of ten dollars per hour for the 
forbidden delay; twenty states have hours-of-service laws, 
varying from ten to sixteen hours; twenty states have full- 
crew laws; twenty-eight states have headlight laws, with 
varying requirements as to the character of the lights, 
and fourteen states have safety-appliance acts. Sixteen 
states have enacted statutes, each asserting for itself the 
individual right to control the issue of stocks and bonds 
of interstate carriers. 

"It is manifest that if such issue is to be regulated by 
the individual state, every state is at the mercy of the 

* Quoted by Kahn, Business and Economics^ p. 81. 



154 THE ELEMENTS OF ECONOMICS 

others. A bond to be available in the market, must, as a 
rule, be secured upon the whole railroad line; and this 
crosses many states. One of the states, therefore, if it 
possesses the power to regulate the issue of securities of an 
interstate carrier, may defeat a financial plan approved by 
all the other states, and necessary to the carrier's trans- 
portation efhciency," 

It would seem to be clear that railroads doing an inter- 
state business should be left to the jurisdiction of the 
Interstate Commerce Commission. 

The Railroads and the Great War. — The war brought a 
great demand for railroad transportation. There were 
millions of soldiers to be transported and millions of tons 
of supplies to be taken to the ports of embarkation. The 
task was a heavy one for the railroads and the United 
States Government assumed control. Mr. McAdoo was 
made director-general of railroads. He treated the rail- 
roads of the country as a unit, and important savings and 
increased efficiency were secured. Unnecessary passenger 
trains were eliminated, and rates for passengers and freight 
were raised. It became necessary to increase the pay of 
railroad employees and this was done. Government opera- 
tion was successful inasmuch as the required service was 
rendered, but it was not a financial success. The condi- 
tions were exceptional and probably private ownership 
would have been at least as unremunerative. The rail- 
roads were restored to their owners in September, 1920, 
with certain temporary government guarantees. 

Water Transportation. — ^American shipping was impor- 
tant in colonial times. Successful shipyards were operated 
in all the colonies before the Revolutionary War. The 




A MODERN OCEAN LINER, THE IMPERATOR 




Courtesy of the New York Central Lines Magazine 
THE TWENTIETH CENTURY LIMITED, ON THE NEW YORK 
CENTRAL RAILROAD 



156 THE ELEMENTS OF ECONOMICS 

prevalence of war in Europe during the closing years of 
the eighteenth century and the opening years of the nine- 
teenth century aided the American merchant marine. Not 
only did our merchant ships carry goods for Americans, 
but about one-half of the exports of the United States in 
1 80 1 was composed of foreign goods which were brought 
to the United States from South America and the West 
Indies for shipment to Europe. Shipments direct from 
South America to Europe were subject to capture, but the 
danger from British ships-of-war was averted by landing 
the goods in American ports and then reshipping them. 
Professor H. C. Adams says: ''The growth of American 
shipping from 1789 to 1807 is without parallel in the his- 
tory of the commercial world." 

The American merchant marine suffered seriously as a 
result of the English Orders in Council of 1804 and 1807 
which declared all ports in France or of her colonies and 
allies closed to neutral vessels unless they first entered a 
British port and paid duties to Great Britain. Napoleon 
responded by his Milan decree which declared that any 
ship obeying the English Orders in Council was subject 
to capture. The War of 181 2 and the restoration of 
peace in Europe resulted in the loss of most of our carrying 
trade. 

In 1840 the carrying trade of the United States began 
to revive. This was the day of the American clippers, 
which surpassed all ships of their time. In building 
wooden ships we had an advantage both in material and in 
skill of ship-builders. These clipper ships, so-called be- 
cause of their sharp, overhanging prow, were especially 
designed for the trade with China. They went, however, 



TRANSPORTATION 157 

to every port. By the time of the Civil War, our shipping 
trade was about equal to that of England. 

During the Civil War American shipping declined be- 
cause of the ravages of Confederate cruisers. However, it 
is probable that our shipping would have declined if there 
had been no war. Changes were taking place which made 
our ships unable to compete with the ships of England. 

These changes were the substitution of iron ships for 
wooden ships and of steam for sails. England led in the 
substitution, but America confidently clung to the old 
style. America saw her mistake too late. Our carrying 
trade was practically lost. In 1914 less than 10 per cent_ 
of our foreign trade was carried in American ships. 

Shortly after the United States was forced to enter the 
World War by the hostile acts of Germany, it became 
evident that the war would be lost unless more ships were 
built to carry supplies to England and France, or unless 
the unlawful submarine policy of Germany could be de- 
feated by destroying the submarines. The United States, 
in co-operation with our allies, was successful in both 
endeavors. By Act of Congress a Shipping Board was 
created with almost limitless resources. During the first 
year of its operations — ^August, 191 7, to August, 1918 — 574 
ships were launched, with a tonnage of 3,017,238. The 
activities of the Shipping Board were just reaching their 
height when the armistice was declared. The production 
of ships from September, 1919, to February, 1920, was at 
the rate of 4,250,000 tons a year. In June, 1920, the 
United States had a sea-going merchant marine of 12,406,- 
123 tons, compared with 18,110,652 of England, exclusive 
of her colonies and dependencies. 



158 THE ELEMENTS OF ECONOMICS 

The Merchant Marine Act of 1920. — Under the terms of 
the act of 1920, the ships built or building by the United 
States Shipping Board were transferred to a new shipping 
board. This Shipping Board is composed of seven com- 
missioners appointed by the President with the consent of 
the Senate. The Shipping Board is authorized to sell all 
vessels which it does not want. Americans have the first 
option of purchase. The board may lay out ship routes 
and operate them, or it may sell or charter ships to Amer- 
ican citizens for operation on these routes. The sum of 
$25,000,000 a year for five years may be used by the 
board, out of its revenues, as loans to American builders of 
steam vessels. These loans shall not exceed more than 
two-thirds the cost of the ships and shall be secured by 
liens on the ships. 

Trade on the Great Lakes. — The navigation laws of the 
United States restrict the coastwise trade of the United 
States, the trade on American rivers, and upon the Great 
Lakes to American ships. The trade on the Great Lakes 
is of much importance. Grain, iron ore, and copper ore 
are the principal goods that are shipped East via the Great 
Lakes. Coal and heavy machinery and manufactured 
goods make up the bulk of west-bound shipments. 

Summary. — In this chapter we have followed the de- 
velopment of transportation from colonial times to the 
present. The great obstacles to inland transportation 
were the dense forests and the numerous rivers. It was 
much easier to go from New York to Boston by sea than 
to go by land. In the days of sailing ships an ocean voyage 
was always uncertain and at times dangerous. Roads 
were much desired and were built by private companies as 



TRANSPORTATION i59 

soon as it was thought they would pay. Both Federal and 
state governments aided in road construction and the 
principal cities of the United States were connected by 
roads as early as 1840. 

With the advent of railroads interest in long-distance 
wagon-roads declined, but has been revived in our own 
days by the coming of the automobile. Gradually toll 
roads were abolished by the states assuming ownership 
and now toll roads are very few. 

The canal came into prominence early in the nineteenth 
century. Though canals are more expensive to build than 
roads, the cost of hauling a ton per mile on a canal is much 
less than by road. The building of canals was, in turn, 
halted by a better system of long-distance transportation. 

Railroad-building commenced in the third decade of the 
last century, but did not reach large proportions until after 
1840. From 1840 to the opening of the Civil War railroad 
construction was pushed with energy in the states east of 
the Mississippi River. The first lines were short ones, but 
before the end of this period local lines were being consoli- 
dated into through lines. After the Civil War, the trans- 
continental lines were constructed, the Federal Government 
helping with land grants and with loans. 

Private ownership and operation of railroads was un- 
restricted until the passage of the Interstate Commerce 
Act in 1887. This act, as amended from time to time, is 
designed to compel the railroads to deal fairly with all 
their patrons. 

The foreign commerce of the United States was carried 
in American ships until 1807. The American carrying 
trade suffered by the English Orders in Council, Napo- 



i6o THE ELEMENTS OF ECONOMICS 

Icon's Milan decree, and the War of 1812. In 1840 it was 
revived again to decline during the Civil War. The Ship- 
ping Board built a vast merchant fleet during the World 
War and the American Merchant Marine Act of 1920 seeks 
to keep our merchant marine on the sea. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What long-distance roads pass through your city? Where do 

they go? 

2. What canals are in your state? Have any canals in your 

state been abandoned? Why? 

3. What are the principal railroads of your state ? What are the 

principal goods they ship into your city? What do they 
take out of your city? What competition do the railroads 
of your city have to face? 

4. Are there any automobile trucking companies which operate 

long-distance routes from your city? Where do they go? 
How do rates compare with the railroad rates ? Would you 
prefer to ship household furniture by railroad or automobile 
from Indianapolis to Cleveland if the rates were the same? 
if it cost 25 per cent more to ship by an automobile truck? 
Why? 

5. Do you think the Merchant Marine Act of 1920 was a measure 

in the interest of all Americans? Give reasons for your 
opinion. 

6. Should subsidies be given to American ships in order to enable 

them to compete with EngHsh and German ships? Why 
can't they compete without subsidies? What advantages 
come to America through a large merchant marine? 



CHAPTER XIV 
MERCHANDISING 

Trade Produces Utility. — The ancient Greeks and Ro- 
mans did not look with favor upon trade. To build up a 
fortune by trade implied to them that cheating had been 
practised. Both parties to a trade may and ordinarily do 
profit. A man who has more automobiles than he needs 
may exchange one of them for a piece of land upon which 
to build a summer cottage, with a man who has a large 
amount of land and wants an automobile. Both parties 
to the transaction benefit. It makes no difference whether 
the transfer is made directly by barter or indirectly through 
the use of money and a middleman. It is clear that an 
article, in the possession of one who can use it, is worth 
more than in the possession of one who cannot use it. 
Therefore exchange creates a variety of utility which we 
may call *' possession utility." 

The advantages of trade are well illustrated by an ex- 
perience of General Grant when he was President of the 
United States. Grant had purchased a horse from a 
butcher for the sum of $250. He was pleased with his 
bargain and, showing the horse to a senator, boasted that 
it had cost him only $250. The senator was not impressed 
with the bargain and remarked: ''Well, I think I would 
rather have the $250 than the horse." The President 
replied: ''That is just what the butcher thought." 

161 



i62 THE ELEMENTS OF ECONOMICS 

Each party to the transfer was pleased. The President 
preferred the horse; the butcher preferred the $250. Every 
exchange, unless deception is employed, may be beneficial 
to both parties. 

Importance of Merchandising. — The business of mer- 
chandising ranks as one of the most important in the 
United States. Every person is a merchant at one time 
or another. In the United States about 4,000,000 people 
make a Hving by trade. Only agriculture and manufac- 
turing give employment to larger numbers. 

Storage.— A merchant buys in large quantities and sells 
in small quantities. His business is to provide goods at 
the time and in the quantities needed. All merchants 
store goods, but the business of storage may be sepa- 
rated from merchandising, as it is by many warehouse- 
men. 

Though storage is an economic service, it may be a 
means of ''cornering" the market. For example, a man 
may buy all the eggs for sale and place them in storage. 
He has "cornered" the market and may refuse to sell 
except at an exorbitant price. "Cornering" the market 
is a dangerous game. As prices rise goods will flow from 
other places and this tends to lower the market price. 
Probably more money has been lost than gained by 
attempts to "corner" a market. 

If goods are stored in time of abundance and sold in 
time of scarcity, the market tends to be stabilized, since 
buying goods for storage when they are abundant creates 
additional demand, and selling them when they are scarce 
creates additional supply. The price of eggs in June, for 
example, would be lower were it not for the thousands of 



MERCHANDISING 163 

cases of eggs that are put in storage during that month, 
and the price of eggs in January would be higher were it 
not for the eggs taken out of storage in January. If, how- 
ever, a "corner" is created in storage eggs, famine prices 
may be charged for the part of the eggs taken out of storage 
and much of the supply of storage eggs be permitted to 
spoil or be sold for other than food purposes. This is 
uneconomic, but the speculator may be enriched by charg- 
ing more for a part of the supply than he could get for 
the entire stock. 

The High Cost of Selling. — Professor Gerstenberg * re- 
marks that the cost of selling the world's goods is greater 
than the cost of producing them. For many goods this is 
certainly true. In recent years the cost of selling has been 
rising, because the public now demands more service. 
Delivery, fancy packages, charge accounts, return of goods, 
and telephone service cost money. This expense must be 
met by an increased price. Much of this cost might be 
lessened, if those who carry goods home were given a dis- 
count or those who pay cash received some benefit from 
such payments. The man who carries home his purchases 
and pays in cash is obliged to help support an expensive 
delivery system and must help meet the loss from bad 
accounts. ''.The consumer pays for the oil used in the 
engine, the ink used in printing the invoice, the book- 
keeper's pen, the chairman's mahogany desk, the cost of 
cutting the grass in front of the office, the director's motor- 
car, the pages' buttons, the firm's subscriptions to charity, 
the very smoke that floats from the tall chimney; and, 
finally, the simple or elaborate tomb to mark the last 

* Principles of Business, p. 414. 



i64 THE ELEMENTS OF ECONOMICS 

resting-place of the body of the man who possessed the 
requisite genius to make the dream a reaHty." * 

Salesmanship. — Many articles sell themselves. One 
goes to a grocery store and buys potatoes, apples, and 
flour, but even in such simple purchases some qualities of 
salesmanship help. Customers prefer to go to a grocery 
where the clerks are polite, clean, know the stock, and 
give honest weight. 

The selling of many goods, such as stocks and bonds, 
requires expert knowledge and is almost a profession. 
Among the qualities of a good salesman must be knowl- 
edge of the stock and confidence in it — if he cannot have 
confidence he should resign — a pleasant manner and tidy 
appearance and some knowledge of psychology, which latter 
he may have without knowing the meaning of the word. 

The art of selling books has largely passed with the prac- 
tical disappearance of the old bookstore and its clerks 
who knew and loved books. The book department of the 
average department store is generally conducted without 
much knowledge of books. The man who asked for a 
copy of a book by John Stuart Mill and was handed The 
Mill on the Floss, did not have a unique experience. The 
automobile salesman, on the contrary, generally knows his 
business and conducts it upon scientific lines. 

Advertising. — You may have wondered why a manu- 
facturer or a dealer would pay $15,000 for one page in one 
issue of a weekly magazine. The answer is that it pays. 
Advertising is a part of the expense of merchandising, and 
the cost must be paid by the consumer. This does not 

* Derrick, How to Reduce Selling Costs. Quoted by Gerstenberg, 
Principles of Business, p. 413. 



I 




THE "CURB" MARKET ON BROAD STREET, NEW YORK 

Here stocks and bonds were marketed which were not listed on the Stock 
Exchange. On June 27, 192 1, the New York Curb Market Association moved 
into its new building on Trinity Place. 



i66 THE ELEMENTS OF ECONOMICS 

mean that the large advertisers charge higher prices than 
those who advertise less extensively, for the large adver- 
tiser may do so extensive a business as to make the charge 
against a single article exceedingly small. Advertising 
renders an economic service in telling where goods may be 
obtained and in explaining the advantages of certain goods. 
Some advertising is merely designed to cause purchasers 
to get goods from one dealer rather than from another or 
to cause them to buy one article rather than another. 
The following advertisement illustrates this: 

USE BLANK'S DENTAL CREAM 

Why Should You Use An Inferior Article 

When You Can Get The Best? 
It Costs No More Than The Imitations. 

Other advertising creates a new demand. For example/ 
a dental cream might be advertised as follows : 

A CLEAN TOOTH NEVER DECAYS 

Your Health, Appearance, And Pockethook 
• Demand Good Teeth. 

Use Blank's Dental Cream And Have Clean Teeth. 

The advertising of electric wa&hing-machines is con- 
ducted so as to create (i) a desire to possess a washing- 
machine, (2) a demand for the particular machine. It 
combines two ideas in one advertisement. 

Most advertising is good, though some kinds are better 



MERCHANDISING 167 

than others. Advertisements that disfigure works of na- 
ture or destroy beauty anywhere are to be condemned. 
It is doubtful whether such advertising is profitable in 
any way. It repels more people than it attracts. Fortu- 
nately advertising of this nature is on the decline. 

The Principle of "Caveat Emptor." — In merchandising, 
the rule is that the purchaser must be on his guard. After 
a sale is made, provided there was no misrepresentation, 
the incident is closed. Misrepresentation may come with- 
out any words being spoken. In selling food it is implied 
that it is fit for human consumption. The purchaser has a 
certain degree of protection in the desire of the seller to 
maintain his reputation; he may generally depend upon 
goods sold under a trade-mark. 

The requirement of the government, under the Pure 
Food Act, that certain food products and drugs must be 
guaranteed by the packers, further protects the purchaser. 

Purchasers of stocks in bogus or highly speculative cor- 
porations have no adequate protection in most states. If 
no misrepresentation occurred, the sale stands. Stocks 
and bonds that are sold on the New York Stock Exchange 
are all genuine securities of reputable corporations; no 
others can be listed. But stocks of corporations of the 
most doubtful value are freely sold in most places. A 
large number of people are always eager to invest in any 
'^ get-rich-quick" concern. A few years ago mining stocks 
of this nature were being sold. Now oil stocks are more in 
demand. It is a common saying that some promoters can 
sell the blue sky. Hence ''blue-sky laws" have been 
passed in some states to prevent the sale of securities of 
doubtful companies. These "blue-sky laws" require that 



i68 THE ELEMENTS OF ECONOMICS 

no stock shall be sold unless permission is obtained from a 
designated state official. To obtain this permission the 
exact status of the corporation and its prospects must be 
submitted and sworn to under oath. 

Summary. — Merchandising is one of the chief employ- 
ments of our people. Good merchandising consists in giv- 
ing full value and giving it in a pleasant manner. The 
seller of an article should benefit and so should the pur- 
chaser. Supplying goods in the quantity in which they 
are desired and at the time they are desired is the func- 
tion of a dealer. Storing goods when they are plentiful 
and selling them when they are scarce is an economic 
service. The high cost of selling is the result of demands 
from the public for increased service. Advertising is a 
legitimate business expense. The purchaser pays for ad- 
vertising, but the cost is usually slight to each purchaser. 
The legal principle of caveat emptor means that the pur- 
chaser must be on his guard. This does not justify mis 
representation. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What are the advantages of "chain stores"? What are the 

disadvantages ? 

2. Why have the mail-order houses been able to do such a large 

business? What advantages do they have over the local 
dealer in a small town? Is it fair to local dealers to 
patronize mail-order houses ? 

3. Give some personal experiences in dealing with good sales- 

men; with poor salesmen. 

4. Secure a copy of a popular magazine and show what adver- 

tisements you consider the best. Show why they are 
better than others. 



MERCHANDISING i6g 

5. Write a suitable advertisement for a real-estate development 

near your city. Write an advertisement for a toilet-soap. 

6. Advertisers wish to know what sort of advertising is most 

profitable. How can they get this information? 

7. In the State of New York any one is at liberty to remove 

advertising signs which are placed upon public property 
along the public roads. Give your reasons for approving 
or condemning this legislation. 

8. What advertising do you think is harmful to a community ? 

9. Most physicians and dentists consider that it is undignified 

for them to advertise. Show why you agree or disagree 
with them. 
10. Should churches advertise? Write an advertisement which 
you would consider proper for a church. 



CHAPTER XV 
INSURANCE 

What is Insurance? — Insurance is a protection against 
risk. Financial loss caused by death, accident, illness, fire, 
flood, theft, and other perils may be partially or wholly 
avoided by insurance. Insurance secures freedom from 
anxiety. A man whose house is insured benefits though 
his house does not burn. A man whose life is insured has 
a knowledge that those who are dependent upon him will 
not suffer from poverty if he should die. This is worth 
what it costs. 

Insurance has sometimes been compared to gambling. 
It has been alleged that if a person insures his life for 
$i,ooo by paying a premium of thirty dollars a year, he is 
betting thirty dollars against $i,ooo that he will die during 
the year. This is incorrect. He is purchasing protection 
and he receives it. This is an economic service and gam- 
bling never renders an economic service. 

Fire Insurance. — In its modern form, Nicholas Barbon 
of London originated fire insurance. This was in the year 
1667, one year after the great fire in London. Barbon 
insured buildings only. Richard Povey, also of London, 
in 1706 added protection of goods. At first the business 
was conducted by individuals, but in 1720 the London 
Assurance and the Royal Exchange Assurance were granted 
corporate charters. The first American company was 

170 



INSURANCE 171 

organized in Charleston, South Carolina, in 1735. How- 
ever, it survived only a few years. The Philadelphia 
Contributionship was founded in 1752. Benjamin Franklin 
was interested in this company and served as a director for 
several years. By the beginning of the nineteenth century 
the country was well supplied with fire-insurance com- 
panies. Many of them failed through incompetent man- 
agement. As a result the state governments undertook 
to exercise supervision over the conduct of insurance cor- 
porations. 

Most insurance against loss by fire is carried by large 
companies doing business over the entire country. This 
spreading of risks over a large field eliminates the danger 
that a company may become bankrupt by a great local 
fire. To protect itself further against a local loss, a com- 
pany finding itself carrying too many risks in one locality 
will reinsure some of them in another company. 

The Contract. — ^A fire-insurance contract is known as a 
policy. This policy describes the property insured, states 
terms and rates, and how long the insurance is to last. The 
rate charged depends upon the nature of the property, 
upon the character of the neighboring buildings, and upon 
the protection against fire furnished by the community. 
Fire-insurance contracts generally run for three years. 
Companies will insure for three years for twice the amount 
charged for one year. 

Prevention of Fire. — The losses by fire in the United 
States are annually greater than those in any European 
country. It would be unfair to draw the conclusion that 
Americans are less careful in preventing fires than are 
Europeans, because there are few wooden houses in Europe, 



172 THE ELEMENTS OF ECONOMICS 

and private houses are less thoroughly heated there than in 
America. The economic loss by fire is very great; in one 
year (191 7) the fire losses in the United States amounted 
to $250,753,640; during the year 1917 in New York City 
alone there were 14,053 fires, with a loss of $14,278,523. 
Doubtless a large proportion of this loss could have been 
prevented by greater care in regard to flues, keeping live 
coals from contact with wood, and cleaning away rubbish. 
In some cities there is a day each year set apart as 
"fire-prevention day." On this day citizens are asked 
to inspect stoves and flues, clean closets and cellars, 
and to see that danger from fire is reduced as much as 
possible. 

Lloyds. — ^A man whose name was Lloyds kept a coffee- 
house in London in the seventeenth century. This place 
became a resort for men engaged in shipping and foreign 
trade. Marine, or sea, insurance grew to be a part of the 
business transacted, and the famous organization known as 
Lloyds perpetuates the name. 

Lloyds does not insure property of any kind but furnishes 
headquarters for individuals and companies engaged in the 
insurance business. It has a system for the inspection of 
ships with agents in every important port all over the 
world. The persons who do business at Lloyds specialize 
in marine insurance but write every variety of insurance. 
At Lloyds a person who is planning to give a pageant may 
be protected against rain, a dealer in court costumes may 
be insured against the court going into mourning, or the 
risk of war may be the object of a policy. 

Life Insurance. — ^The first real life insurance company 
was the ''Old Equitable" of London, organized in 1762. 



INSURANCE 173 

The beginning of life insurance in America was a society 
formed in 1759 in Philadelphia for the benefit of Presby- 
terian clergymen and their families. The Insurance Com- 
pany of North America was organized in 1796. This was 
followed by the New York Life & Trust Company in 1830. 
The first mutual company was the Mutual Life Insurance 
Company of New York, organized in 1843. 

Life-insurance companies are either stock companies or 
mutual companies. The latter are supposed to be managed 
by the policyholders, but actually the management is in 
the control of a small group of financiers. A very con- 
siderable amount of life insurance is carried by fraternal 
organizations of various kinds, losses being paid by assess- 
ments. These societies are subject to the inspection of 
state departments of insurance and are obliged to conduct 
their business on approved business lines. 

The Life-insurance Policy. — The contract between the 
insured and the insurer, known as the policy, must con- 
form to state standards. There are various kinds of 
policies, the most common are straight life, limited-pay- 
ment life, and endowment. A straight life provides for 
life insurance, the premiums payable at stated intervals 
so long as the policy is in force. A limited-term policy 
provides for a certain number of premium payments. 
After these have been made the poHcy is ''paid-up" and 
no further premiums are required. An endowment policy 
furnishes protection during the term for which it is written 
and, if the insured is living at the end of the term, the 
amount of the policy is paid to him. 

Dividends. — Dividends are payments made to poHcy- 
holders while the policy is in force or, in addition to the 



174 THE ELEMENTS OF ECONOMICS 

principal when an endowment policy becomes due. Divi- 
dends spring from two sources: 

1. Insurance is generally based on the assumption that 
the rate of interest is 4 per cent. Should the company be 
able to lend its funds at more than 4 per cent there will be 
a surplus. 

2. The premiums are a little more than necessary to 
cover the risk. 

Dividends may be used at the option of the policy- 
holder either to reduce the next premium or to increase 
the amount of insurance, or may be paid in cash. 

The Scientific Basis of Life Insurance.— Though the 
future cannot be foretold in reference to an individual, if a 
large number of persons in good health at any specified age 
be taken, it can be told how many will be surviving at ten, 
twenty, or any number of years. There are a number of 
mortality tables calculated for every age, but the American 
Experience Table is most widely used in the United States. 
The accuracy of these tables is manifest from the existence 
and strength of American insurance companies. Of course 
the insured pays more than the amount of risk, as the 
premiums are "loaded ' to cover the overhead charges and 
to give a profit to the company. Part of the earnings of 
the stock companies is paid to the policyholders in divi- 
dends, and in mutual companies the poKcyholders share in 
the earnings. 

State Supervision of Insurance. — To protect the public 
against improperly organized or poorly managed com- 
panies, the various states prescribe the form of insurance 
contracts which may be written, and supervise, through a 
superintendent of insurance or other state official, the con- 



INSURANCE 175 

duct and resources of the company. The insurance com- 
panies find reason to complain of the lack of uniformity 
of state regulations and especially of the burden of taxa- 
tion which they are obliged to bear. They would prefer 
Federal regulation because it would be uniform throughout 
the states, and they claim that high taxation is against the 
interests of the policyholders, as it must be passed on to 
the insured. 

In Italy life insurance is a State monopoly. New Zea- 
land engages in life insurance as a State activity but permits 
private companies to do business. Wisconsin, after enact- 
ing insurance laws which were regarded as unduly harsh 
by the insurance companies and which led some companies 
to withdraw from that state, entered upon life insurance 
as a state enterprise in 1913. 

Old Age Insurance. — ^A very large number of people 
have provided for their old age by insurance ever since 
endowment and annuity forms of insurance have been 
written. Many persons are unable to afford the expense 
of thus providing for old age. Endowment for old age in 
the form of pensions for soldiers, policemen, firemen, and 
teachers has long been common in this country. Some- 
times the whole expense is borne by the public; sometimes 
the expense has been shared by the annuitant. The argu- 
ment in favor of compulsory insurance for state and city 
employees of a non-political nature who are receiving a 
wage or salary insufiicient to enable them to provide for 
old age, seems just as strong when considered in reference 
to those who are in private employ. In Germany there is 
compulsory old-age insurance for most employees, the em- 
ployer and employee sharing the expense and the State 



176 THE ELEMENTS OF ECONOMICS 

adding a contribution of fifty marks annually. In Great 
Britain, Australia, and New Zealand every working man is 
given a small pension when he reaches the age of seventy 
provided his annual, income is below $153 a year. The 
entire cost of these pensions is borne by the State. 

Accident Insurance. — The chance of accident is ever- 
present. Numerous private companies insure against acci- 
dent, but on account of the expense few working men can 
avail themselves of this insurance. The British Work- 
mens' Compensation Act of 1897 requires the employer, 
in case of disability on account of an accident incurred 
while engaged in work, to pay one-half of the former wage, 
not exceeding one pound per week, and in case of death 
from accident an amount equal to three years' wage but 
not less than £150 nor more than £300. Most British 
employers of labor insure their employees in a liability 
insurance company, though the law does not prescribe 
this, permitting employers to meet its conditions in any 
way they may prefer. In Germany in 1884 an act was 
passed which compelled employers of labor to insure their 
employees against accident at a rate of two-thirds their 
former wage in case of total disability and lesser amounts 
for partial disability. Until recently laborers in the United 
States had only the protection afforded by a lawsuit against 
their employer in case of accident. If it could be shown 
that the employee was negligent or that a fellow employee 
was negligent no relief was afforded by law. Recently 
many of the American states have enacted laws requiring 
employers to insure their working men against accidents. 

Insurance against Sickness. — Insurance against sick- 
ness is more difficult to manage than other forms of insur- 



INSURANCE 177 

ance, as the chance of fraudulent claims is greater. How- 
ever, insurance against sickness is written by many com- 
panies and fraudulent claims are reported to be relatively 
rare. In Germany there has been compulsory insurance 
for sickness among working men since 1883, one- third of 
the expense being borne by the employer and two-thirds 
by the employees. Great Britain introduced compulsory 
insurance of this kind in 191 1, but in the United States 
there is no insurance against sickness for working men, 
except such as is afforded by fraternal orders and the aid 
that may be extended by labor unions. 

The Usual Objections to State Insurance of Working 
Men. — It is often claimed that insurance of laboring men 
makes them improvident; if old age, accident, and sickness 
are provided for by insurance, the laborer will not be 
encouraged to provide for himself. Unfortunately, without 
insurance the ordinary laborer either cannot or will not 
provide against these perils, and the amount of the insur- 
ance is never so great as to act as a deterrent to savings. 
It is further argued that it is a burden upon the employer, 
but if the same burden is placed upon all employers it 
becomes a part of the cost of production and may be 
shifted to the public, where it belongs. The statement, 
often made, that the payment or pension is spent foolishly 
amounts to nothing. Wages are often spent foolishly and 
so are the salaries of professional men. 

Group Insurance. — Group insurance is a recent form of 
protection against risk which has become popular. Any 
employer of fifty persons may take out a group policy 
which will protect each of the fifty. Only one policy is 
written, but a certificate is given to each person insured. 



178 THE ELEMENTS OF ECONOMICS 

The group policy usually covers only the risk of death, but 
may include other risks. Premiums on group insurance 
are lower than in other kinds of insurance, and medical 
examination is not required if the protection is only against 
the risk of death. All the great life-insurance companies 
will insure on the group plan. Many bankers, college 
trustees, and manufacturers have taken out group insur- 
ance for their employees. 

Summary. — Insurance is protection against risks. The 
insured receives what he purchases, whether or not mis- 
fortune comes to him. Fire insurance is the oldest kind 
of insurance. It is now regarded as a part of the necessary 
expense of business. Life insurance has become prominent 
since the middle of the last century. The contract between 
insurer and insured is called a policy. In life insurance 
these policies are ordinarily straight life, limited-payment 
life, or endowment. Life insurance has a scientific basis 
in the mortahty experience tables. Insurance against old 
age, accidents, and sickness are among the more recent 
kinds of insurance. Insurance of certain classes of work- 
ing men is compulsory in Germany and England. Some 
American states require employers to insure their em- 
ployees against such accidents as may happen while actu- 
ally engaged in their duties. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

I. Some of the great railroad systems insure themselves against 
fire. Why might it not be a wise policy for a grocer to 
place the same amount in his bank each year that insurance 
would cost him and thus insure himself? Is th'ere any dif- 
ference between his risk and that of a railroad company? 



INSURANCE 179 

2. Make a list of varieties of insurance not mentioned in the 

text. What are the advantages of these kinds of insurance? 
What are the disadvantages, if any? 

3. Should a man twenty-five years of age insure his life on the 

straight life, the limited payment, or the endowment plan? 
What are the advantages of each? Which plan would be 
better for a man fifty-five years old? 

4. What fraternal organizations having lodges in your city insure 

their members ? What kinds of insurance do they provide ? 

5. Is any insurance of workmen required in your state? Give 

the principal requirements of the law. What do the em- 
ployers think of it? The employees? 

6. How does insurance differ from gambling? 

7. Some people have said that in life insurance a person has to 

die to win. Show the fallacy of this argument against life 
insurance. 



CHAPTER XVI 
MONEY 

What is Money? — Whatever passes freely from hand to 
hand in the purchase of goods, or services, or in payment 
of debt is money. In colonial days wampum and tobacco 
were so used. They were money, because they did the 
work of money. Now coins or notes issued by the govern- 
ment are money; so are bank-notes issued by banks under 
authority given by the government. Checks and drafts 
are not money, because they do not pass freely. A dollar 
bill will be accepted anywhere without regard to the 
character of the person who offers it. A check or draft 
ordinarily will not be accepted for the purchase of a rail- 
road ticket or for postage stamps, and an unknown person 
always has difficulty in using checks or drafts. 

What Money Does. — Money performs three services: 

1 . It serves as a medium of exchange. 

2. Money is a measure of value. 

3. It is a standard for deferred payments. 

Money as a Medium of Exchange. — Exchanges may 
take place without the use of money. Barter was em- 
ployed long before money was known. Barter, or the 
direct exchange of one thing for another, is even now fre- 
quently employed. In the rural districts eggs and butter 
are taken to the store and exchanged for coffee and sugar. 
Even in the city some newspapers have an ^'exchange" 
column, where those who have articles they do not need 

180 



MONEY i8i 

may advertise to exchange them for goods which the}- 
desire. Barter is inconvenient because the person who 
wishes an article frequently cannot find another person 
who both desires the article to be bartered and has some- 
thing acceptable to offer in exchange. For example, you 
may have a bicycle which you wish to exchange for a 
cornet. There may be difficulty in finding a person who 
wants a bicycle and has a cornet. Then there is lack of 
uniformity in the values of articles. The cornet may be 
worth two bicycles and something has to be paid '' to boot." 

Money overcomes all these difficulties. It is in universal 
demand and can be offered in such units as may be desired. 
Every one, except a miser, wants money for what it will 
purchase. It may be spent for present wants or kept to 
supply future wants. 

Money as a Measure of Value. — To-day values of goods 
and services are commonly measured in terms of money. 
When we say that a horse is worth $200, a cow worth $85, 
and a dog worth $1, we measure all these by a common 
standard. Values may be measured in terms of a standard 
which is not used as a medium of exchange. In colonial 
times values were expressed in terms of English money, but 
exchanges were effected by many varieties of foreign coins. 
In some parts of the United States values are still expressed 
in terms of shillings, though there are no shillings now in 
circulation in the United States. 

Money as a Standard for Deferred Payments. — Goods or 
services may be bought now and payment made at some 
time in the future. Justice to both debtor and creditor 
demands that the purchasing value of money should change 
as little as possible. A debt for $100, contracted in 1900 



i82 THE ELEMENTS OF ECONOMICS 

and paid in 1920, would not have returned to the creditor 
the purchasing power which he dehvered in 1900. A debt 
for $100, contracted during the World War and paid now, 
would require the debtor to return more purchasing power 
than he received. Changes in the value of money always 
injure either debtor or creditor. 

Qualities Necessary for Good Metallic Money. — A 
metal to be used as money should possess large value in 
small compass. It should exist in quantities sufficient to 
furnish the necessary amount of money. In the second 
place it should have stability of value. Absolute stability 
of value is impossible, but it should be a metal which differs 
in value as little as possible from time to time. Another 
necessary quality is durability. A good metal for monetary 
purposes must be one which is easily recognized and diffi- 
cult to counterfeit. This quaHty is known as cogniza- 
hility. Other desirable quaHties are homogeneity, meaning 
that each unit of a certain weight and fineness must be 
like any other unit of equal weight and fineness, and 
divisibility, which means the ability to be divided easily 
into units without loss of value. 

The qualities mentioned above attach especially to gold 
and silver, though more particularly to gold. Gold has 
become the recognized standard of all the great commercial 
nations of the world, silver being retained as ''token 
money," or change. 

Coinage. — When metals were first used as money, they 
passed by weight. The names of such coins as the English 
pound, the Jewish shekel, and the Greek talent show that 
they were originally measures of weight. Coinage became 
an official guarantee of fineness and weight and did away 



MONEY 183 

with the necessity of testing metals whenever exchanges 
were made. The coinage of money was originally the 
function of kings, and kings frequently reduced the amount 
of metal in coins, though the name of the coin remained 
the same. This practice is known as ''debasing " the coin. 

Seigniorage and Brassage. — Under the despotic sover- 
eigns of mediaeval Europe, debasing the coinage was com- 
mon. Not infrequently the coins were debased under the 
guise of a charge for coinage which was called seigniorage 
and was maintained as a sovereign right. Money thus 
debased generally fell in purchasing value to the value in 
exchange of its metallic content. If a country had no 
foreign trade, debased coins might circulate for a time at 
their face value, if not issued in excessive quantities and 
if confidence existed that they could be passed to others. 
But debased coins will circulate in foreign countries only 
at the value of their metalHc content. Seigniorage is not 
at present practised by any great nation. 

Some European nations extract from the metal the cost 
of coinage; this is called brassage. The United States 
charges no brassage for its gold coins and has free coinage 
of no metal except gold. 

Free Coinage. — A country has free coinage of a metal 
if it will coin all sufficiently large quantities of that metal 
which are brought to the mint. The United States will 
exchange gold coins of an equivalent weight for gold bul- 
lion, when brought to the mint in quantities to the value 
of $100 or more. This is free and unlimited coinage. The 
gold dollar contains 23.22 grains of fine gold. On account 
of the small size of the gold dollar, its coinage was discon- 
tinued in 1890. 



i84 THE ELEMENTS OF ECONOMICS 

The other metals used by the United States for monetary 
purposes are purchased in the market at current prices and 
coined as needed and as the law directs. The metallic 
value of none of the minor coins is equal to their face 
value. They circulate within the United States at par 
because they are not issued in large quantities and because 
they are sustained by the credit of the United States. 

Gresham's Law. — ^According to Gresham's law — so called 
in honor of its discoverer, Sir Thomas Gresham — when 
two or more kinds of money are in circulation at the 
same time, the poorer money will tend to drive the better 
money out of circulation. 

The application of Gresham's law is both national and 
international. A person who has a worn coin or a dirty 
paper dollar will put it in circulation and retain his better 
money, even though each has the same purchasing power. 
Gresham, however, meant his law to apply to coins which 
had the same face value, but different value as metals. If 
the metal in a coin has more value for use in the arts than 
for monetary purposes, it will be withdrawn from circula- 
tion and its metal used for making some piece of jewelry 
or other article. Moreover, no one would think of taking 
metal to the mint if its value as metal is greater than the 
value of the coin which would be made frorn the metal. 
Thus the supply of the metal for the better coin is cut 
off at the source. 

In the payment of debts owed to foreign creditors coins 
are worth only their metallic value, hence the better 
money will go abroad and the poorer money will stay at 
home. The following illustration will make clear the way 
in which poor money drives good money out of circulation : 



MONEY 185 

Let us assume that each of two countries has free coinage 
of gold and that each country has $1,000,000 in circulation 
and the rapidity of circulation in each country is the same 
and other conditions in the two countries are similar. 
Under these conditions one dollar would have the same 
purchasing value in each country. Now suppose that 
Country A puts into circulation $250,000 in debased silver; 
it will then have a total circulation of $1,250,000 and $1.25 
will be required to buy what $1 would previously have pur- 
chased. In Country B prices have not changed and gold 
will flow from Country A into Country B because it will 
purchase 25 per cent more in the latter country. This will 
continue until the volume of .money is the same in each 
country, but it will all be gold in Country B. Let Coun- 
try A add another $250,000 in silver and it will drive 
another $250,000 in gold out of the country and by con- 
tinuing this practice will in time lose its gold circulation 
and go on a silver basis. 

Bimetallism in the United States. — The truth of Gresh- 
am's law is well illustrated by the history of attempts at 
bimetallism in the United States. When the mint was 
opened in accordance with the Act of 1792, there wsis free 
coinage of both gold and silver at the ratio of 15 to i, the 
silver dollar having 371^ grains of fine silver and the gold 
dollar 243/^ grains of fine gold. The silver dollar was 
therefore fifteen times as heavy as the gold dollar. This 
was at the time the market ratio, but the market ratio 
soon changed, so that gold was more valuable as metal 
than as money. Under these circumstances no more gold 
came to the mint and what had been in circulation disap- 
peared. In 1834 Congress changed the ratio to 16 to i, 



i86 THE ELEMENTS OF ECONOMICS 

but this time it overvalued gold, and silver disappeared 
from circulation. In order to retain subsidiary silver 
coins, or change, in circulation Congress reduced their 
weight. The gold discoveries in California and Australia 
still further separated market and mint valuations, and no 
silver dollars were in circulation when the Civil War com- 
menced. Excessive issues of paper money during the war 
drove both gold and subsidiary silver coins out of circu- 
lation. Apparently Congress had now come to recognize 
the impossibility of national bimetallism, for an Act of 1873 
dropped the silver dollar from the coins of the United 
States. However, the discovery of rich silver deposits in 
Nevada and other Western territories and states caused a 
drop in the price of silver and by 1878 the market ratio 
was 18 to I. At once there was created a demand for the 
free coinage of silver. This demand came from the owners 
of silver-mines, from debtors who wished to pay their 
debts with cheaper money, but chiefly from those who hon- 
estly but erroneously thought bimetallism could be main- 
tained and that it would be advantageous to the country. 
A compromise between the free-silver advocates and the 
supporters of the gold standard was arranged in 1878. 
This was known as the Bland-Allison Act. The terms of 
this act empowered the Secretary of the Treasury to pur- 
chase for coinage purposes not less than $2,000,000 and 
not more than $4,000,000 worth of silver every month. 
The free-silver men had predicted that this would cause a 
rise in the price of silver, but silver continued to fall in 
value, as the mines were producing increased quantities. 
The demands for the free coinage of silver again were 
raised and again a compromise was made by the Sherman 



MONEY 187 

Act of 1890, which increased the amount of silver pur- 
chases to 4,500,000 ounces of silver a month to be pur- 
chased at a price not exceeding $1 for 371.25 fine grains. 
This silver was to be purchased by the issue of treasury 
notes, which were redeemable in coin and were full legal 
tender, and the silver was to be coined as demanded for 
redemption of the notes. 

The Sherman Act did not stop the fall in the price of 
silver, but it did result in a large amount of gold going 
abroad. Large blocks of American securities held in 
Europe were sold in America and the proceeds sent to 
Europe in gold, as Europe feared America was about to 
go on a silver basis. The gold reserve, that is, the gold 
held in the Treasury chiefly to redeem the greenbacks, 
was depleted by holders of greenbacks demanding gold. 
Treasury notes, issued under the Sherman Act, were in 
the same manner presented for redemption in gold, in 
which coin they were very properly redeemed though the 
law authorized redemption in either gold or silver. A 
commercial depression was coincident with the financial 
unrest and some action was necessary to relieve the situa- 
tion. President Cleveland called a special session of Con- 
gress in the autumn of 1893 ^^^ recommended the repeal 
of the silver-purchase clause of the Sherman Act, which 
repeal was accomplished after a bitter struggle in which 
partisan lines were largely disregarded. Not until the ad- 
vocates of free coinage of silver at the ratio of 16 to i were 
defeated in two presidential campaigns was the United 
States definitely placed upon a gold standard in 1900. 
The Act of 1900 requires the Secretary of the Treasury to 
keep all money of the United States equal to gold. 



i88 THE ELEMENTS OF ECONOMICS 

International Bimetallism. — We have seen that national 
bimetallism is impossible. International bimetallism has 
some advocates. It is held by them that the great nations 
of the world, by adopting bimetallism at any reasonable 
ratio, could maintain that ratio because of the immense 
demand for silver which would be created. Whether such 
would be the result is at least doubtful, and the experiment 
is not likely to be tried. The metallic money of the 
United States has no superior in the world. Gold coins 
of our country are good anywhere in the world. Our sil- 
ver coins are as good as gold at home. Under these cir- 
cumstances an experiment in international bimetallism has 
no attraction for us. 

Summary. — Barter is the exchange of one article for 
another. Barter is often inconvenient and money has 
come into general use. Money performs three important 
services: it is a medium of exchange, a measure of value, 
and a standard for deferred payments. Good money is 
made from metals that have large value in small compass, 
stability of value, durability, homogeneity, and divisibility. 
Gold and silver possess these qualities, but gold to a greater 
degree than silver. Free coinage is the coinage of all 
metal of a certain kind that may be presented at the mint 
in sufficiently large quantities. The United States has 
free coinage of gold. Gresham's law is that a poorer 
money drives a better money out of circulation. It is 
well illustrated by the history of bimetallism in the United 
States. Token money, or change, is issued in small quan- 
tities in the United States. We see token money often 
because of its rapidity of circulation. 



MONEY 189 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Consult one of the more important histories of the United 

States for an account of the use of wampum and tobacco for 
money in colonial times. 

2. What are the smallest gold coins ever issued by the United 

States? Why are they not now issued? What token 
money was once issued by the United States and then dis- 
continued? Why discontinued? What would be the ad- 
vantages if the United States were to coin half-cents? 
What disadvantages? 

3. What should a person do who has received a counterfeit coin 

and does not know from whom it was received? 

4. The story is told that a ferryman plying his trade on the Rio 

Grande started the day by entering a place of refreshment 
and purchased a drink for which he offered in payment an 
American dollar and received in change a Mexican dollar 
which was at that time worth ninety cents in the United 
States. Going to the Mexican side he ordered another drink 
and paid for it with his Mexican dollar, receiving in exchange 
an American dollar then worth ninety cents in Mexico. 
This process was repeated each trip and in the evening he 
had his original American dollar on the American side of 
the river. Assuming that the story is true, who paid for 
the drinks? 

5. Read in one of the larger histories of the United States in our 

own time about the free-silver campaigns of 1896 and 1900. 
What arguments were made for free silver? What were 
made against it? 

6. Discuss the advisability of the United States resuming the 

coinage of the three-cent and the two-cent piece. 



CHAPTER XVn 
PAPER MONEY 

Varieties of Paper Money. — There are three kinds of 
paper money: redeemable, non-redeemable, and bank- 
notes. The redeemable paper money is issued by the 
government of the United States and may be either in the 
form of certificates or government notes. The certificates 
are worded as follows: " This is to certify that there have 

been deposited in the Treasury of the United States 

silver (or gold) dollars, payable to bearef on demand." 
The notes read: " The United States will pay to bearer on 

demand dollars." Non-redeemable paper money is 

usually a promise to pay on demand or at some time in 
the future. During the Civil War the United States issued 
promises to pay, which are known as Greenbacks, but was 
unable to meet its obligations until 1879. Now all paper 
money of the United States is redeemable. Bank-notes 
are promissory notes issued by banks. They read as fol- 
lows: "The Federal Reserve Bank of New York will pay 
to bearer on demand dollars." 

Redeemable Paper Money. — Redeemable paper money 
is secured by gold and silver held for that purpose in the 
treasury of the government. Paper money of this sort is 
just as good as the metal for which it may be exchanged. 
It saves the wear and tear on the metal and has a con- 
venience in use which makes it preferable to metallic 

190 



PAPER MONEY 191 

money for some purposes. The gold and silver certifi- 
cates of the United States are examples of redeemable 
paper money. 

It is possible for a country to issue notes in excess 
of the redemption fund. There are outstanding about 
$346,000,000 in greenbacks, but the reserve fund is only 
$150,000,000, though the Secretary of the Treasury is re- 
quired to sell bonds to replenish the gold reserve whenever 
it falls below $100,000,000. While there is public confi- 
dence in the currency of the country, few greenbacks are 
presented for redemption, but they are none the less a 
weak point in the monetary system of the United States, 
and it would be a wise policy to reduce them gradually to 
$150,006,000 or to retire them from circulation. 

Irredeemable Paper Money. — Irredeemable paper money 
is merely a promise to pay. The value of such money 
depends upon the credit of the country. During the 
Revolutionary War, the Continental Notes were of so 
little value that the term ''not worth a continental" signi- 
fied a near approach to worthlessness. The phrase "not 
worth a continental dam," signified not worth a counter- 
feit (damn^tus, or condemned) continental note. Irre- 
deemable paper money has been used chiefly in time of 
war. To compel people to accept it, it is often made legal 
tender, by which it is made legally receivable for debts. 

Since the government compels people to take such 
paper money, legal-tender notes of this sort are a forced 
loan. 

The United States had an important experiment with 
irredeemable paper money during the Civil War. The 
first issue of government notes during the Civil War was 



192 THE ELEMENTS OF ECONOMICS 

in 1861, when $50,000,000 in ^^ demand notes" were issued. 
They were not made legal tender, but were receivable for 
all payments due the government. Early in 1862 a new 
issue of $150,000,000 in government notes was placed in 
circulation. These notes were legal tender and soon be- 
came known as "greenbacks." They had no security back 
of them except the promise of the United States. From 
time to time additional notes were issued until a total of 
$430,000,000 in greenbacks was in circulation. Gold went 
out of circulation and prices rose with every fresh supply 
of greenbacks. A brisk speculation in gold was conducted 
in the "gold room" in New York, the value of gold in 
terms of greenbacks fluctuating not only with the amount 
of greenbacks in circulation but with general conditions in 
the country and especially with the success or failure of 
the armies of the United States in the field of battle. In 

1862 it took $1.13 in greenbacks to equal a gold dollar; in 

1863 the greenback equivalent of a gold dollar was $1.45, 
and in 1864 it was $2.03. Greenbacks remained at a dis- 
count until just before the resumption of specie payments 
in 1879. Greenbacks were at first thought to be only a 
temporary expedient, and in 1866 Congress passed an act 
for their gradual retirement, but the act was repealed two 
years later. An act of 1878 provided that there should be 
$346,681,000 in greenbacks outstanding and authorized 
their re-issue when presented to the Treasury. Since 1900 
they have only been re-issued in exchange for gold. 

The greenbacks demoralized the circulating medium 
during the war, cost the government vast sums of money 
because it sold bonds for which greenbacks were paid but 
which were redeemable in gold, and created a demand for 



PAPER MONEY 193 

^' cheap money." Besides all this the greenbacks were 
partly responsible for the speculative mania which swept 
over the country. There is no need of the issue of irre- 
deemable paper money by a great country even in time of 
war. Napoleon conducted one of the greatest series of 
wars without resort to such an expedient. 

Fiat Money. — Irredeemable paper money is often known 
as fiat money, because the government says that it is 
money.* Such issues will circulate among people accus- 
tomed to the use of paper money, especially if made receiv- 
able for taxes and other government dues. It will, in 
accordance with Gresham's law, drive better money out 
of circulation. Excessive issues of paper money will cause 
prices to rise and will lead to a fictitious prosperity for a 
time. When prices are rising, business men expand their 
interests and all seems well, but not to creditors whose 
credits have less purchasing power and not to wage- 
earners and salaried employees, because their pay rises 
more slowly than prices. The end of inflation of the 
currency is often a panic, brought about by overspecula- 
tion. The remedy for inflation is deflation, which is a 
painful though necessary process. 

Bank-Notes. — ^A large part of the circulating medium of 
most countries consists of bank-notes. These are promises 
to pay, usually on demand; they are paid out as money 
by the banks and circulate among the people as money. 
Until 1866 banks throughout, the United States issued 
bank-notes under the authority of the laws of the several 
states. Some states, notably New York, prescribed con- 

* Fiat is third person singular, present, subjunctive, of the Latin verb 
"fio." Literal meaning is "let it be done." 



194 THE ELEMENTS OF ECONOMICS 

ditions which made their bank-notes as good as gold, but 
other states permitted banks to issue notes almost without 
any regulation. The issues of these ''wildcat banks" cir- 
culated at various rates of discount, depending upon the 
credit of the issuing bank. Merchants were necessarily 
careful to scrutinize every note and were obliged to con- 
sult a periodical issued for that purpose in order to find 
the current quotations on notes of various banks. 

The National Banking System. — The national banking 
system of the United States was established in 1863, 
chiefly to provide a market for United States bonds. The 
National Banking Act has been amended from time to 
time, but the essentials remain as in the original act. As 
the act now stands the capital of a national bank must 
not be less than $25,000 in a place of 3,000 population, and 
the capital necessary for a national bank increases with the 
size of the place until it reaches $200,000 for cities of more 
than 50,000 population. These banks are privately owned, 
and any bank which conforms to the law may become a 
national bank. These banks may issue bank-notes, which 
are not legal tender, but are receivable for taxes, except 
duties on imports, under the following conditions : 

1. Each bank must invest part of its capital in bonds 
of the United States. 

2. By depositing bonds in the Treasury of the United 
States, authority is given to issue notes not to exceed the 
par value of the bonds. Should the bonds fall below par 
value the Comptroller of the Treasury, who has charge of 
the administration of the law, may require- deposits of 
additional bonds. 

3. There must be deposited in the Treasury of the 



PAPER MONEY 195 

United States a fund in gold equal to 5 per cent of the jout- 
standing bank-notes of the bank. 

4. No bank may issue notes in excess of its capital. 

The national bank-notes were absolutely safe. A pro- 
hibitive tax of 10 per cent put out of existence the bank- 
notes of state banks. 

Elastic Currency. — Elastic currency is currency that ex- 
pands and contracts in volume with varying demand for 
money. In the autumn there is always an increased 
demand for money on account of the movement of the 
crops. Western banks, which have deposited a part of 
their reserves in New York and Chicago, call for a return 
of these deposits in the autumn when they are needed at 
home. The Eastern banks need no less currency in the 
autumn, and unless the currency is elastic a stringency in 
the money market develops every autumn. In times of 
financial panic the need of an elastic currency is even more 
pronounced. Ordinary commercial instruments of credit, 
by means of which in normal times a vast amount of busi- 
ness is done, become acceptable with more and more diffi- 
culty as a panic grows and at last may be refused. At 
such times people demand "real money," and the collapse 
of credit results in a demand for additional currency. 

The national bank notes were inelastic. The first step 
toward giving an elastic currency was taken in 1908 when 
the Aldrich-Vreeland Act authorized issues of notes by 
national banks upon other securities than United States 
bonds. The notes thus issued were taxed at the rate of 
5 per cent a month for the first month, the tax increasing 
I per cent a month until a maximum of 10 per cent was 
reached. As the rate of interest on money rises with 



196 THE ELEMENTS OF ECONOMICS 

stringency in the money market, the Aldrich-Vreeland Act 
would tend to reHeve the situation in a panic, but it would 
not take effect until the situation was already bad. 

The Federal Reserve System. — The Federal Reserve 
Act of 1 9 13 gave the United States a new banking system. 

The Federal Reserve Board is the directing head of the 
system. This board consists of seven members, five ap- 
pointed by the President of the United States and two 
ex-officio members: the Secretary of the Treasury and 
the Comptroller of the Treasury. The country is divided 
into twelve districts and there is a Federal Reserve Bank 
in each district. These banks are now in New York, 
Boston, Philadelphia, Richmond, Atlanta, Cleveland, 
Chicago, Minneapolis, St. Louis, Kansas City, Dallas, and 
San Francisco. The stock of the Federal Reserve Banks 
is all held by other banks and they have no direct dealings 
with the public; they are banks which deal only with 
banks. Every national bank is required to be a member 
bank. This it may become by subscribing to stock of the 
Federal Reserve Bank in its section equal in amount to 
6 per cent of its capital and surplus. Trust companies 
and state banks may become member banks if they so 
desire and if they meet the prescribed conditions. 

Issues of Currency by Federal Reserve Banks. — There 
are two kinds of currency which may be issued by Federal 
Reserve Banks: Federal Reserve Bank Notes and Federal 
Reserve Notes. 

I. Federal Reserve Bank notes. These notes are very 
similar to national bank notes. National banks are author- 
ized to sell the bonds which are security for their national 
bank notes to a Federal Reserve Bank. The national 



PAPER MONEY 197 

bank notes will then be retired, and the Federal Reserve 
Bank will hold these bonds as security, and issue Federal 
Reserve Bank notes. It is expected that Federal Reserve 
Bank notes will gradually replace national bank notes. 

2. Federal Reserve notes. Much more important than 
Federal Reserve Bank notes are Federal Reserve notes. 
Federal Reserve notes may be issued upon the security 
either of gold or commercial paper deposited by a mem- 
ber bank in a Federal Reserve Bank. In each case the 
security is held by the Federal Reserve Bank, which sends 
to the member bank the Federal Reserve notes, and these 
are put into circulation the same as any other money. 
Notes secured by gold are secured dollar for dollar, thus 
making them similar to gold certificates. A reserve of 40 
per cent in gold is required for notes secured by commer- 
cial paper, though the law permits this reserve to be 
waived by consent of the Federal Reserve Board. It will 
be noted that additional currency can readily be secured 
whenever necessity arises; this is one of the strong features 
of the Federal Reserve Banking Act. An issuing bank 
may redeem Federal Reserve notes, but no Federal Re- 
serve Bank may pay out notes of another Federal Reserve 
Bank, but must return them for credit or redemption. 
Federal Reserve notes are virtually guaranteed by the 
United States. 

Money in Circulation in the United States. — The table 
on page 198 shows the various kinds of money in the 
United States on February i, 1921. 

This table shows that most of the metallic money of the 
United States is in the form of gold coin. Most of it is 
held as reserve by the banks and as a redemption fund for 



igS 



THE ELEMENTS OF ECONOMICS 



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PAPER MONEY 199 

gold certificates. The people of the United States prefer 
paper money to gold, so long as the paper money is as good 
as gold, and not much gold is used in ordinary business. 

It should be noticed that Federal Reserve notes have 
become the principal paper money of the United States, 
although a considerable volume of national bank notes is 
still in circulation. 

Summary. — Paper money is of three kinds: redeem- 
able, non-redeemable, and bank-notes. These look very 
similar, but are worded differently. The United States 
now has no non-redeemable paper money. During the 
Revolutionary and Civil Wars our experience with paper 
money was such that we are not likely to repeat it. Bank- 
notes are issued by national banks and by Federal Reserve 
Banks. The Federal Reserve notes are designed to give 
us an elastic currency, that is, a currency which rises and 
falls to meet the conditions of demand. AH the money of 
the United States is as good as gold. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What paper money in less denominations than one dollar has 

the United States issued? Under what circumstances was 
this money issued? 

2. Give a history of issues of paper money during the Civil War. 

3. Investigate the experience of the Confederate States of America 

in reference to paper money. 

4. Compare the National Bank notes and the Federal Reserve 

notes, 

5. Get the opinion of a business man, a lawyer, and a banker on 

the Federal Reserve notes. 



CHAPTER XVIII 
MONEY AND PRICES 

The Quantity Theory of Prices. — ^According to the quan- 
tity theory, prices vary directly with the amount of money 
in circulation. An increase in the volume of money will 
Taise prices, a decrease will lower prices. This theory is 
accepted with the modification that other things being 
•equal, it is true. Rapidity of circulation is an item to be 
considered. Two countries may have the same amount of 
money in circulation and there may be the same number 
of exchanges to be made, but if the money of one country 
circulates more rapidly than that of the other, it is doing 
more work, which is equivalent to its having a larger 
amount of money and has the same effect on prices. In- 
struments of credit, like checks and drafts, may also take 
the place of money to a greater extent in one country than 
another and in the same country at different times. 

Effects of Changes in the Volume of Currency. — ^Any 
changes in the amount of money in circulation will be 
reflected in prices. Inflation inflicts an injury on creditors, 
as debts can be paid in less purchasing power and con- 
traction injures, the debtors. Inflation tends to promote 
speculation and gives rise to a fictitious prosperity for a 
time. With prices rising there is a rush to buy and to 
manufacture, but this leads to overproduction in some 
lines of goods and a reaction must come, which frequently 
results in a panic. Inflation seriously affects the purchas- 
ing power of returns from investments as well as pensions 

200 



MONEY AND PRICES 



20I 



and insurance. If all prices were to rise with the same 
degree of celerity, less harm would be done, but prices do 
not rise uniformly. Prices of goods rise quickly, then 
profits and rents rise, but wages and salaries lag behind. 

Contraction, or deflation of the currency, leads to a 
slowing down of industry and a difficulty in securing 
credit. It works harm to the debtor classes as they must 
pay more in purchasing power than they received when 
their debts were contracted. 

The Multiple Standard. — ^To enable debts to be paid 
with equal purchasing power, despite changes in the value 
of money, several plans have been suggested. The sim- 
plest of these is a multiple standard. If a number of 
articles in common use be selected and their prices ten 
years ago be found and compared with their prices now, 
it would be easy to show how much money would now be 
required to equal the purchasing power of a certain amount 
of money ten years ago. 

The following table illustrates the principle of the mul- 
tiple standard: 



Goods which $ioo 
would purchase < 
in 1910 



I ton coal 

I suit woolen clothing 
I bushel wheat 
I bushel potatoes 
I stove 
I table 

100 miles transportation 
Ordinary amusements for 
one month 



To purchase similar 
> goods in 1920, 
about $250 would 
be required. 



Inflation and Contraction. — There are several ways in 
which the amount of money may be so increased as to be 
considered inflation of the circulating medium. Even 
though a country be on a gold standard, it is possible that 



202 



THE ELEMENTS OF ECONOMICS 



the opening of new and rich gold mines may lead to a 
rapid increase in the number of gold coins and consequently 
a rise in prices. Such a condition actually occurred when 
the mines in California and Australia were first opened. 
Such an inflation seldom lasts long, as the richer veins are 
soon exhausted and the expense of production returns to 
the old level. There may be inflation of metallic money 
in case the coin value is less than the metallic value and 
such money is coined in large quantities, and the inflation 
of paper money is familiar to all. 

Contraction is the opposite of inflation. Contraction of 
gold coins might be caused by a failure of the mines to 
produce the amount of gold needed. Contraction in paper 
money may be the result of the withdrawal of some of the 
paper money from circulation. 

Index Numbers. — Changes in prices may be indicated 
by index numbers. Index numbers may be found in a 
very simple way. The prices for any given time may be 
taken as base prices and changes in prices reckoned in rela- 
tion to base prices. For example, take a ton of iron, a 
pound of cotton, a bushel of potatoes, and a bushel of 
wheat. 



Article 


Base Price 

Sept. I, 

1920 


Base 


Price, 
1930 


Percentage 

of 1920 

base 


One ton iron 


$50 
. 20 

I 50 

2.75 


100 
100 
100 
100 


$25 
.10 
I 50 
1 .00 


50 

50 

100 

36.36 


One pound cotton 

One bushel potatoes 

One bushel wheat 


Average 




400 
100 




236.36 
59-09 



MONEY AND PRICES 203 

Assuming tJiat prices in 1930 will be as given in the 
above table, the index number for 1920 would be 400 and 
for 1930, 297; or, reducing each to an arithmetic mean, the 
index number for 1920 would be 100 and for 1930, 59.09. 

The best-known index numbers for the United States 
are those of the United States Bureau of Labor, which are 
based upon the wholesale prices of 240 commodities. The 
rise of prices from 1914 to 1920 is indicated by the following 
table: 

Year • Index Number 

1914 100 

1915 lOI 

1916 124 

1917 176 

1918 196 

1919 212 

It should not be assumed that increase in prices has 
been wholly due to inflation of the' currency. Other fac- 
tors such as inefflciency of labor, profiteering, and the in- 
crease in taxation have also had their influence. 

The Stabilized Dollar. — Professor Irving Fisher, the 
eminent economist of Yale University, has proposed a 
plan for ^'stabilizing the dollar" by abandoning the present 
standard gold dollar and substituting for it a paper dollar 
redeemable in gold but in a varying quantity of gold, the 
amount being so regulated as to keep the purchasing power 
of the dollar as nearly constant as possible. When prices 
rise, as indicated by index numbers, the dollar would be 
redeemable in a greater quantity of gold, thus bringing 
prices down; when prices fall the gold in exchange for the 
paper dollar would be decreased so as to raise prices. 

Economists differ in regard to the probable efficiency of 



204 THE ELEMENTS OF ECONOMICS 

Professor Fisher's proposal. The general impression seems 
to be that it would work well in normal times, but would 
prove an injury in times of panic or war. The plan could 
hardly be put into effect by one nation, as it would seriously 
disturb foreign exchanges in times of financial stress and, 
as explained by Doctor B. M. Anderson,* even if the plan 
were adopted by an international agreement, the index 
number might, in times of rapid changes in prices, have so 
different a relation to the scale of prices in one country as 
compared to another as to cause confusion in exchanges 
and general dissatisfaction. To adopt such a plan when 
prices are abnormally high would be, in Doctor Anderson's 
opinion, "to perpetuate all the suffering of people on fixed 
incomes." 

Summary. — Other things being equal, prices will rise and 
fall with an increase or decrease in the amount of money 
in circulation. An increase in the amount of money suffi- 
cient to raise prices very much is called inflation of the 
currency. A material decrease in the volume of money is 
deflation, or contraction. Multiple standards and index 
numbers are methods whereby changes in the purchasing 
value of money may be measured. Professor Fisher has 
proposed a ''stabilized dollar," or a dollar redeemable in 
different quantities of gold, the amount depending upon 
the purchasing power of gold at the time of reden^ption. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

I. How do increases in the amount of money affect salaries? 

Have salaries of teachers risen as rapidly as has the cost of 

living ? 

* The Fallacy of the Stabilized Dollar. Published by the Chase National 
Bank of New York. 



MONEY AND PRICES 205 

What class of persons benefited from the rise in prices during 
the war? What class of persons were injured? 

What causes other than changes in the volume of currency 
affect prices ? What is the tendency of prices now ? Why ? 

Make an investigation of index numbers. References: Ely, 
Outlines of Economics, pp. 337-343; Fisher, Elementary Prin- 
ciples of Economics, pp. 247-257; Taussig, Principles of 
Economics, vol. I, pp. 291-293, 441. 

Get the opinion of a banker or business man on Professor 
Fisher's plan for a stabilized dollar. 



CHAPTER XIX 
BANKING AND CREDIT 

The Banking Functions. — There are three major services 
performed by banks: 

1. Deposit. 

2. Discount and loan. 

3. Issue.* 

Many minor functions are incidental to the banking 
business, such as the collection of checks, notes, bills of 
exchange and drafts, the buying and selling of securities, 
the renting of safe-deposit boxes and vaults, and the per- 
forming of many services of a fiduciary or commercial 
nature. The incidental functions of banks, many of which 
produce no revenue for the banks, are matters which cause 
the most expense in time and labor. 

^' Interest upon loans and investments is the bank's chief 
source of income, although the clerical work involved in 
the making of loans and discounts is in very small pro- 
portion compared with the tremendous outlay of time, 
labor, and overhead expense met with in providing services 
which will attract depositors. Thus it happens that the 
bank, viewed as a workshop or counting-house, may pre- 
sent a figure of extreme industry not in any way related to 
the earning power of the bank's resources. Between 75 per 
cent and 90 per cent of the accounting work of a commer- 
cial bank grows out of the services which the bank renders 

* See Chapter XVIII, pp. 193-197. 

206 



BANKING AND CREDIT 207 

its depositors, the bank rarely receiving any fee by way of 
payment, but looking to the income derived from the 
deposits for reimbursements and profit." * 

Not all banks perform all the possible banking func- 
tions. The function of issue, described in a previous chap- 
ter, is confined in the United States to banks associated 
in the Federal Reserve banking system and such incidental 
functions as the safe-keeping of valuables and acting as 
trustee for estates, etc., are not performed by many banks. 

The Deposit Function. — The deposit function needs little 
explanation. It is obviously of advantage to one who has 
more money than he immediately needs to deposit it in a 
bank for safe-keeping, even should the bank pay no interest. 
It is also advantageous to society that this be done, as 
deposits concentrated in a bank can be put to work, while 
if scattered among thousands of small holders employment 
for them is not so easy and the chance of loss is vastly 
greater. 

Loans and Discounts. — The deposits in a bank at one 
time may amount to $400,000 and at another time may 
fall to $340,000, but the experience of the bank may show 
that the deposits never fall below $340,000. It is clear 
that the bank may loan a large part of its deposits to 
its customers, only being sure that its depositors may 
receive their money on demand. In addition to the de- 
posits, the bank may lend its own funds or credit. A per- 
son coming to a bank to borrow may secure funds or credit, 
on his own note, usually indorsed by a second person, 
payable at some specified future time, usually not over 
three months. Funds may be secured without the in- 

* Wolfe, Practical Banking, p." 22. 



2o8 THE ELEMENTS OF ECONOMICS 



rORM NO. BA 



Sl*O00.Qo SSroJciun, J^u^oi'J^^tiu, Jiuift.5^ -i99-2X, 

On lR«....9th ..iloj of.. AugBSj6 "«*, o^o* <•«*•, f»t VALUE RECEIVED — t ..... 

p«.mue to pa^ {. Ubc Vliisis» f^at^cmal ISanh of JSroohli^ti, <^ o.i«v ai «<»» 

SBan£„...Q.ne..};ll6UaaUd SitSianA, 

wild uxXmmX ut .6%. . per annum, ttoAina JwoAtted WUn aouI bOanc a« caffiit«ial «<ciuU« |ar 

toe paument ol totA note. 

100 shares 'L H.H. CoBmon 



with such additional collaterals as may from time to time be required by any of the Officers of said Bank, and which 

I hereby promise to furnish on demand. If these required collaterals be not so given upon demand, then this 

note shall become due and payable. And— 1 hereby give to' said Bank, or its assigns, full power to sell, as- 

sigm and deliver the whole or any part of said collaterals, or any substitutes therefor, or any additions thereto, at any 
Stokers' Board or at the New York Produce Exchange or elsewhere at public o.r private sale, at the option of such 
holder, on the non-performance ef any of the promises herein contained , and without notice of amount due or claim- 
ed to be due, without demand of payment, without advertisement and without notice of the time or place of sale, 
each and every of which is hereby expressly waived ; and on any such sale the Bank, its assign or any of the Offi- 
cers of said Bank may purchase. 

It is Fubther Aoreed, that any surplus arising from the sale of said collaterals, beyond the amount due 
hereon, shall be applicable upon any other note or claim of the said Bank arising directly or by assignment against 
..ine at the time of said sale, whether the same be then due or not due. 

And it is Fubther Agreed, that any moneys or properties, at any time in the possession of The Nassata. 
National Bank belonging to any of the parties liable hereon to said Bank, and any deposits, balance of deposits or 
other sums at any time credited by or due from said Bank to any of said parties, shall at all limes be held and 
treated as collateral security for the payment of this note or the indebtedness evidenced hereby, whether due or not- 
due, and said Bank 'may at any time, at its option, set off the amount due or to become due hereon against any 
claim of any of said parties against said Bank. 

And it is Further Agreed, that upon the non-performance of any of the promises herein contained, thau 
any and all notes or claims held by the said Bank at such time and arising directly or by assignment against -me - 
shall immediately become due and payable. 

It is ALSO Agreed, that said collaterals may from time to time, by mutual consent, be exchanged for others, 
which shall also be held by said Bank on the terms above set forth, and may be applied to any other obligation, 
now or hereafter to be incurred by — jne to said Bank, whether due or to become due. 

.iMf^^-^^r^Oi/i^X^^ « 

.31.CoKr.t..at,-B?-9.oMjmL.J}.^X. 

A PROMISSORY NOTE SECURED BY COLLATERAL 

dorsement of a second person by the deposit of acceptable 
securities which will be held by the bank until the loan is 
paid and which may be sold to satisfy the loan if not re- 
paid when it becomes due. These loans are known as 
collateral loans. 

In most cases the borrower does not want money, but 



BANKING AND CREDIT 209 

wants a checking account to the amount of the loan, and 
in these cases no money passes; the bank has merely loaned 
its credit. A bank does not act as a depositor's agent in 
making a loan; it assumes the role of principal, and if the 
loan is not repaid the loss must be borne by the bank. 

Bankers make a distinction between loans and discounts. 
A discount is a loan upon which interest is collected in 
advance. Discounts have a fixed date of maturity and a 
fixed rate of interest. Loans are often payable on demand 
and the interest is collected when the loan is paid. 

Bank Reserves. — Ordinary bank deposits are payable on 
demand and hence a bank must keep on hand sufficient 
cash to meet probable demands. In a community in 
which comparatively little banking is done and deposits 
are left intact for long periods, a small reserve will be 
sufficient; in more active banking centres larger reserves 
are necessary. Reserves held against deposits should not 
be confused with reserves against Federal Reserve notes 
which are discussed in a previous chapter. The cash 
reserves held against deposits required by law vary from 
12^ per cent to 25 per cent, depending upon location and 
whether they are state or national banks. It is estimated 
that for the whole United States one-fifth of the deposits 
are held as reserves. Obviously the larger the amount 
held as reserves, the less there is for the bank to loan. 
Banks regulate their reserves by changing the rate of in- 
terest on loans. If deposits are increasing more rapidly 
than loans, the latter may be stimulated by lowering the 
rate of interest and thus encouraging loans. In order that 
the proper relation between reserves and deposits may be 
maintained the assets of a bank must be as fluid as pos- 



2IO THE ELEMENTS OF ECONOMICS 

sible. Loans are usually made for thirty, sixty, or ninety 
days, so that obligations to the bank are daily coming 
due and a constant stream of funds is flowing into the 
bank. 

Kinds of Banks. — There are many kinds of banks in the 
United States. National banks are organized under the 
terms of the National Banking Act. Each national bank 
must make a statement of its condition to the comptroller 
of the currency five times a year and must be examined 
as to its condition by the Federal bank examiners twice a 
year without notice being given of the time of examina- 
tion. State banks are organized under state laws and are 
subject to examination by bank examiners of the state 
banking department. 

State banks often have a trust department, in which 
case they are generally called trust companies. Trust 
companies, in addition to doing a general banking busi- 
ness, are authorized by law to act as trustees for estates, 
executors of wills, and to administer other trust funds. 
Savings-banks are organized under state laws and are es- 
pecially designed to receive the deposits of those who can 
save in only small amounts. They are usually restricted 
to giving interest on sums less than $5,000 and do not, as 
a rule, allow checking accounts. The laws safe-guarding 
deposits in savings-banks are more strict than in other 
banks. 

A considerable number of private banks exist in the 
United States. These are conducted by individuals or 
partnerships and are generally subject to examination by 
the state banking departments. Most private banks 
doing a commercial business are in small communities, 




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212 THE ELEMENTS OF ECONOMICS 

which have been long estabHshed and which do an exten- 
sive business, though most private banks in large cities 
do not engage in commercial banking, but confine them- 
selves to dealing in stocks and bonds and foreign and 
domestic exchange. 

What is Credit? — Credit may be defined as present pur- 
chasing power, transferred from lender to borrower. Some 
instruments of credit, like bank-notes and government 
notes, are virtually the same as money, but other instru- 
ments of credit, like promissory notes, checks, drafts, bills 
of exchange, and the like, cannot be classified as money, 
yet through their use many exchanges of goods and pay- 
ments for services are made. There are in the United 
States more than $20,000,000,000 of bank deposits and less 
than one-fourth that amount in money. Through the ex- 
change of bank deposits a vast number of transactions are 
effected. Depositors do not usually want money when 
they draw on their accounts; they want purchasing power, 
and this they can obtain in instruments of credit. 

Promissory Notes.— A promissory note is a promise to 
pay a specified sum of money on demand or at some time 
stated in the note. Promissory notes may be '^ single- 
name" or "double-name" notes, depending on whether 
they are signed by one person or signed or indorsed by an 
additional person. Banks, as a rule, require two-name 
paper. The value of a promissory note depends on the 
debtor's willingness and ability to meet his obhgations. 
Promissory notes may be given in exchange for goods. 
The holder of a promissory note may make it payable to 
another person and use it for paying his debts or may sell 
it to a bank or other dealer in credit. 



BANKING AND CREDIT 



213 



Book- Accounts. — Book-accounts are records on the 
books of a creditor of goods or services bought on credit. 
Many goods are bought on thirty, sixty, or ninety days' 
credit. Book-accounts are not often sold, but are not 
infrequently used as security upon which to borrow money. 

Acceptances. — Trade acceptances are drafts which have 
been made by the seller of goods upon the purchaser and 



1 

""J 

9 M 

S o 

m 
Z 



No. 51 



H 
CM 

Thirty dayS 



. -Oils.. -t^ 0134 



John Doe iS 
16 New^irk .uve, ,. 
, Hewark, tl. 4. — m 



IRAPE 



Net^Yom N. ]^j J^g ^^^ yo'^^ y 1 .000. 00 



^_/(/it^_Aate pt^ to the ordet o) OURSELVES 



ACCEPTANCE 



-Dollars. 



The obligation Wthei ccepMr hmpf aH \es out of the purchase of goods from Uie drawer. 
To Joim Doe 1^ al a ^^ j^ ^y 



Due July 9th g 7fl21.3 



31 Court St. 
■Broolflyn, W.Y. 



A trade acceptance is an obligation of the acceptor to pay, The drawer is 
secondarily responsible. A trade acceptance is therefore two-name commercial 
paper. 

which he has agreed to pay. Acceptances have practically 
done away with book-accounts as instruments of credit. 
They are short-term instruments and are legal evidences 
of the debt. They can therefore be readily converted into 
cash, if accepted by responsible merchants, and are espe- 
cially desirable as the Federal Reserve Banking Act permits 
Federal Reserve notes to be issued on approved short-time 
commercial paper.* 



* Acceptances are described as follows in Ettinger and Golieb, Credits 
and Collections, pp. 20, 21. 

"A domestic bill-of -exchange is commonly known as a commercial draft. 
It usually originates in the sale of goods, the seller ordering the purchaser 
to pay either himself or another who will collect. The payee of the draft, 



214 



THE ELEMENTS OF ECONOMICS 



Bonds. — Bonds are promises to pay a specified sum of 
money at some time in the future, usually ten years or 
more. They are used to secure capital needed for a term 
of years, while promissory notes are usually employed for 
short-term loans. 




Paris, France.. June 9th, X9Z1 



///A / , date 



//,'. f/ if < // Brc\?a, Sxiip-nerf".?- i^- "^ 

o g 

Jei t,r),oi::Cdn<} Pranes ^ % ?^ 



51 I^Va; thu'k '-' 



'/''/////'' 



~/-^/fftf{'/ 



A BANK ACCEPTANCE 

When "accepted" by the bank it becomes an obligation of the bank. 



Checks. — ^A check may be defined as a written order 
upon a bank authorizing the payment of a specified sum 
of money to an individual or a corporation or to the bearer. 
A check may be drawn against a deposit of money or 
against a credit established in the bank. A majority of 
large payments are made by checks without the use of 

if it is a demand draft, will cause it to be presented to the drawee, the 
person upon whom it is drawn, for payment. If the seller wishes to give 
the purchaser thirty or sixty days to pay, he will draw a draft payable at 
thirty or sixty days after sight or at some definite time in the future. The 
payee will then immediately cause the draft to -be presented to the drawee, 
and the drawee will accept the draft by writing across the face of the draft 
'accepted.' When the drawee 'accepts' the draft it becomes his promis- 
sory note and the drawer remains secondarily responsible as endorser. The 
accepted draft or, as it is called, the 'acceptance,' may then be sold to or 
discounted at a banking institution." 



BANKING AND CREDIT 215 

money. Thus A may owe B $100, B may owe C $100, and 
C may owe D $100. A gives his check for $100 to B, B 
draws a check for $100 in favor of C, and C pays D |ioo 
by check. Assuming that all the accounts are in one 
bank, the entire series of payments is made without the 
use of money. A^s account is reduced by |ioo and D's 
is increased by $100. The other accounts balance one 
another, and the whole affair is merely a matter of chang- 
ing book-accounts. 

Certified Checks. — ^A certified check is one which a bank 
guarantees to pay. When a check is presented for cer- 






1 *>«<*ei.t 1 

1 ccgAffimx; HpudC. ; 



PdMi^^-^^ ^a^jCzJj^^K^ 



This is a reproduction of a genuine certified check. As soon as a check is certi- 
fied the bank guarantees payment. 

tification to a bank upon which it is drawn, the official 
responsible for certification, usually the paying teller, must 
be sure that the check will not overdraw the account. As 
soon as a check is certified the account of the drawer is 
charged with the amount of the check and the bank be- 
comes responsible for payment. 

The Clearing-House System. — When the banking busi- 
ness of the United States was still in its infancy, checks 



2i6 THE ELEMENTS OF ECONOMICS 

received by one bank which were drawn upon another 
were sent at the end of the banking day to the bank upon 
which they were drawn for payment. Two banks, each 
having checks drawn upon the other, could offset the 
checks held against each other, the balance only being 
paid in cash. A clearing-house is an institution estab- 
lished by banks whereby the accounts of each member 
bank against the others may be adjusted. If there were 
hut two banks in the clearing-house, and each held checks 
of $10,000 against the other, settlement would be made by 
exchanging checks. If one held checks to the amount of 
$15,000 and the other to the amount of $10,000, accounts 
would be balanced by the latter bank paying the former 

$5,000- 

When several banks are associated in a clearing-house 
balances are settled in much the same manner. Each 
bank sends to the clearing-house in separate packages 
checks drawn on the other member banks which it has 
paid. Checks offset checks and balances show the in- 
debtedness of one bank to another. 

Bills of Exchange and Drafts. — ^A bill of exchange is an 
order drawn by one person calling upon a second person 
to pay a specified sum of money to a third person. A 
bank draft is an order drawn by one bank upon another 
bank authorizing it to pay to a specified person a certain 
sum of money. Bills of exchange and drafts are used in 
making payments to persons living in different cities. 
They are commercial paper and may be transferred to 
others by indorsement. 

The Use and Abuse of Credit. — ^Among the most con- 
spicuous advantages of credit are the following: 



BANKING AND CREDIT 217 

1. It enables industrial and commercial enterprises to 
secure capital necessary for establishing and conducting 
business. Most business houses use their credit from time 
to time. 

2. It enables banks to collect many comparatively 
small sums which could not be used to advantage by their 
owners and loan them for use in productive industry. 

3. It puts capital into the hands of those who can 
use it. 

4. It enables persons to borrow in order to prepare 
themselves for a useful career, or to tide over a misfortune. 

Among the abuses of credit are the following: 

1. It may be too freely used in speculation and result 
in a crisis. In the spring and early summer of 1920, loans 
were freely made for the purchase and storage of sugar. 
Speculators imagined that the price would reach thirty- 
five cents a pound in the autumn. The price did rise on 
account of an artificial shortage created by the speculators, 
but the high price caused large quantities of sugar to enter 
the United States and the price soon began to fall. The 
banks called in their loans and the speculators were obliged 
to sell at a loss on a falling market. 

2. Credit may stimulate production in certain lines and 
lead to overproduction in these lines. This is especially 
true when the borrower has too little knowledge of the 
business to enable him to judge the chances of success. 
The candy business was entered in 1920 by many new 
firms financed by borrowing, which were not able to con- 
tinue business when conditions became more normal. 

3. Borrowing for consumption is often uneconomic. 
Borrowing to buy an automobile for pleasure purposes, 



2i8 THE ELEMENTS OF ECONOMICS 

to purchase jewelry, or any consumption good that is not 
a necessity are examples of abuses of credit. 

Summary. — Banks serve the public in many ways. The 
most important duties of banks are concerned with re- 
ceiving and keeping of deposits, making of loans, discount- 
ing promissory notes, and issuing bank-notes. In the 
United States there are several kinds of banks. These 
include national banks, savings-banks, trust companies, 
state banks, and private banks. The chief business of 
banks is dealing in credit. Among the instruments of 
credit are checks, drafts, promissory notes, bonds, and 
trade acceptances. Clearing-houses are devices for settling 
balances between banks. 

Business depends upon credit; without it there could be 
no business in the modern sense. Credit has many ad- 
vantages. Among the more prominent are those men- 
tioned in the text. But it should be remembered that there 
are disadvantages; credit is sometimes too freely used and 
business enterprises are started without a sufficient guar- 
antee of success; credit too freely used in speculation may 
result in a panic; borrowing for consumption is often 
unwise. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Name every kind of bank that does business in your com- 

munity. Show the difference between the various b.anks. 

2. Get a copy of the most recently published statement of some 

bank. Show what each item means. 

3. Why should banks have only "quick assets"? Which of the 

following are quick assets: real estate, government bonds, 
stock in an oil company, notes due in one year, demand 
notes ? 



BANKING AND CREDIT 219 

4. Find out to what extent trade acceptances are used in your 

community. 

5. Describe the business of a clearing-house. Is there a clearing- 

house in your city? If not, how do banks settle their 
balances in dealing with one another? 

6. Would it be economic to borrow money to go to college? To 

pay a doctor's bill? To pay a premium on an insurance 
policy? To take a vacation in the country? To buy a 
diamond ring? 

7. Would it ever be economic to mortgage a house in order to 

obtain money for the purchase of an automobile for pleasure ? 
8- Some stores endeavor to secure a large number of patrons with 
charge accounts. Why do they do this? What are the 
advantages and disadvantages of charge accounts to pur- 
chasers ? 



CHAPTER XX 
INDUSTRIAL DEPRESSIONS AND <:RISES 

A close relationship exists between financial crises and 
industrial depressions. Some economists consider them as 
two aspects of the same thing. A crisis is generally fol- 
lowed by an industrial depression. In the United States 
there were financial crises in 1818, 1825, 1837, 1847, '^^57) 
1873, 1875, 1884, 1893, ^^d 1903- Financial crises have 
generally occurred about once in ten years. This fact led 
the English economist Jevons to associate crises and in- 
dustrial depressions with sun-spots. The larger sun-spots 
occur at intervals of about ten years, and Jevons main- 
tained that they influenced the climate and rainfall on the 
earth and so acted unfavorably upon agriculture. The 
theory of the influence of sun-spots upon the productivity 
of agriculture is not without some plausibility, but the 
sun-spot theory has few advocates, and crises have often 
occurred when the crops were good. They have also 
occurred in years that did not meet the ten-year interval, 
such as in 1869 and 1907. 

True Explanation of Regular Occurrence of Crises. — 
There seems to be a regular cycle from good times to 
industrial depressions, then a slow recovery followed by 
prosperity after which the cycle is repeated. Good times 
are said to contain the seed of their own destruction. 
When times are prosperous a feeling of optimism prevails; 

220 



INDUSTRIAL DEPRESSIONS AND CRISES 221 

people buy freely and prices rise. The banks have abun- 
dant funds and loans are not difficult to secure. Estab- 
lished industries increase their capacity and new industries 
are established, many of them without sufficient working 
capital. The process cannot, however, continue forever. 
Some business concerns begin to find difficulty in selling 
their goods. The banks begin to increase rates on loans 
and discounts, money is hard to get and confidence is 
shaken. Some of the weaker concerns fail and soon all 
begin to retrench. 

Overproduction and Crises. — General overproduction is 
impossible, as it would imply that there are more goods 
of all kinds than the people can consume, but overpro- 
duction of one product is not uncommon. For example, 
there was overproduction of railroads immediately after 
the Civil War. The railroads could not yield any profits 
until the country had grown large enough in population and 
industries to support them, and in the meantime those 
who had financed the railroads suffered. When the rail- 
roads were being built optimism prevailed. There was a 
wild speculation in railroad securities and other essential 
industries were neglected. 

The industrial fabric is like a house of cards. A col- 
lapse in one place may result in the whole structure falling. 
When there is overproduction of some commodity or ser- 
vice, the producer cannot sell at a price sufficient to carry 
on his business. Failure or temporary embarrassment is 
inevitable, and if the industry should be a sufficiently large 
one it will drag others into insolvency and will affect the 
banks from which it may have borrowed funds;. Under the 
present industrial system depressions will occur from time 



2 22 THE ELEMENTS OF ECONOMICS 

to time. A crisis naturally extends from one country to 
another. Some crises have been world-wide, others have 
been confined to one country. Frequently a crisis has a 
local cause, like the bank failures in North Dakota in 1921. 

Crises can be rendered less serious by conservative bank- 
ing and by business houses preparing for possible times of 
depression in their days of prosperity. 

Crop Failures and Crises. — The failure of an important 
crop, such as cotton in the Gulf States or wheat in the 
Northwest, is the cause of a local depression, which may 
extend over the whole country. Banks lend to the farmers. 
If the crops fail, the farmer cannot pay his debts. The 
failure of an important crop has its effects upon the rail- 
roads and upon many industries. If the farmers have no 
revenue, they cannot buy machinery and other supplies. 

The Relation of Middlemen to Crises. — Professor Taus- 
sig, in his Principles of Economics, vol. I, pp. 405-406, 
calls attention to the part played by the distributing 
middlemen — the wholesalers and jobbers and retailers— in 
reference to crises: 

• ''These constitute the immediate purchasing public for 
the 'producers.' When they buy freely, business is brisk; 
when they hold off, business is dull. They are not only 
subject to the psychological contagion; they are also moved 
by very simple calculations of profit and loss. Their 
operations are almost exclusively in the simple purchase 
and sale of goods, and their success depends almost solely 
on prices. They buy freely when they think that prices 
will rise, and cut down purchases when they think that 
prices will fall. The very fact that they so think, and 
accordingly act, accelerates the fall in the other. During 



INDUSTRIAL DEPRESSIONS AND CRISES 223 

an up-swing period, they add to their stocks, thinking to 
sell them at an advance, or at least to protect themselves 
against a later rise in the prices of what they buy. 

''Then comes the shock — a bad failure, a financial panic. 
They jump to the conclusion that ' things are going down,' 
countermand old orders as far as possible, give new ones, 
live from hand to mouth in their purchases and sales, and 
wait until they think that prices have touched bottom. 
Sooner or later a good crop, the unexpected profitableness 
of some new venture, a turn in foreign trade, some such 
event gives the start to a new upward movement. The 
middlemen reach the conclusion that it is time to buy 
again, and to take advantage of low prices. Business 
becomes more active, optimism returns. Prices go up, 
and quickly, because all the dealers now think that they 
will go up, and buy in consequence. There is thus an 
accumulation of extra stocks in their hands in times of 
rising prices, and a depletion in times of low prices; some 
really increased flow to consumers at the one stage, some 
really lessened flow at the other; but also an alternate 
excess and deficiency of the suppHes held in the middle- 
men's reservoir." 

The Banks and Crises. — In times of business depression 
the banks are confronted with a diflicult situation. Busi- 
ness houses desire loans because they cannot market their 
goods to advantage. They do not usually want cash, but 
desire credit or assurance that they will be taken care of 
if necessity should arise. Good banking demands that 
legitimate enterprises should receive all the support that 
a bank can wisely give. 

But another difficulty is apt to arise. Depositors want 



224 THE ELEMENTS OF ECONOMICS 

their money. A vague distrust often, without reason, is 
enough to start a run on a bank. A rumor spreads that 
a bank is in trouble. Crowds of depositors assemble from 
all quarters and form long lines in front of the paying 
teller's window. They are panic-stricken with the fear 
that they will not get their money. Let confidence be 
restored and the run on the bank ceases. Experience has 
taught that large amounts of cash lying on the desk of the 
paying teller will satisfy many that their fear was without 
reason and they will go home. 

Banks have an interest in sustaining each other. A 
failure of one bank is sure to embarrass some other bank. 
Under the Federal Reserve system it is not difficult for a 
member bank which is financially sound to secure cash 
when needed. It merely has to send securities to the 
Federal Reserve Bank of its section and get cash for them. 

A clearing-house may aid member banks, as has been 
done repeatedly in New York. In the crisis of 1907 the 
banks of New York sustained banks which had done a 
sound, conservative banking business, but allowed others 
to fail because they had engaged in reckless banking. In 
that same crisis many sound banks did not have at hand 
sufficient cash to meet the demands of depositors and 
restricted withdrawals to small amounts. Such a pro- 
cedure w^as unusual, but pardonable. It need not occur 
under the Federal Reserve banking system as previously 
explained.* One reason for increased demands for cash 
in time of panic is that confidence in checks and other in- 
struments of credit is shaken. People wish ^'real money" 
and are inclined to accept nothing else. 

* See pages 207-210. 



INDUSTRIAL DEPRESSIONS AND CRISES 225 

In time of panic the banks see their deposits diminishing 
and the demand for loans increasing. They can secure 
cash for meeting the demands of insistent depositors by 
selhng some of their securities or by discounting some of 
their commercial paper. Loans may be discouraged by 
raising rates of interest. This will result in discouraging 
any one from borrowing, unless he really needs the money 
and is willing to pay for it. 

Summary. — Industrial depressions and crises are closely 
related. Industrial depressions come when goods cannot 
be sold at a profit. Business houses restrict their output 
and hard times result. It has been observed that de- 
pressions come in cycles of about ten years. Prosperity 
leads to overexpansion and overspeculation and these 
bring on a depression. Though overproduction of all 
goods is impossible, there may be overproduction of one 
product; in this case it is impossible to sell the product 
at prices which will pay for its production and a business 
depression comes to producers of that article. This may 
involve others. Crop failures may result in a depression, 
which may cause a financial crisis. Financial crises are 
the result of a collapse in credit and make money scarce. 
In time of crises banks are in need of money and so they 
raise rates of interest in order to discourage loans. To 
secure additional money they sell securities and discount 
commercial paper. These are not profitable transactions 
in time of depression. The Federal Reserve banking 
system furnishes a means for member banks getting money 
in time of need. 



226 THE ELEMENTS OF ECONOMICS 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What goods have you known to sell at less than the cost of 

production? What was the cause and the result? 

2. Give an account of some speculation in real estate in your 

vicinity. What were its results? 

3. What was Black Friday? References: Any of the larger his- 

tories of the United States covering the period since the 
Civil War. 

4. Give an account of the crisis of 1893. Reference: Same as 

above. 

5. Are the present times prosperous or the reverse? What is the 

outlook for the future ? 

6. How may the Federal Reserve Banks prevent or lessen the 

severity of a panic? 

7. Why are prices low in time of panic? 



CHAPTER XXI 

INTERNATIONAL TRADE 

Nature of International Trade. — Trade between nations 
does not differ essentially from trade between different 
parts of the same nation. Goods are made where they 
can be produced to the greatest advantage. Oranges are 
grown in California and in Florida and shipped to the 
east and north. Shoes are made in New England and 
New York and shipped to California and Florida. Each 
section profits by doing what is best suited to it. Like- 
wise Italy and Spain grow fruits for northern Europe and 
in return import manufactured articles. Brazil sends 
coft'ee to the United States and imports automobiles. 

It does not necessarily follow that a country will send 
out only articles which it can produce more cheaply than 
the country with which it is trading. 

For example: Country A produces iron at a cost of 
twenty dollars per ton and coal at a cost of five dollars 
per ton. Country B produces iron at a cost of eighteen 
dollars per ton and coal at a cost of two dollars per ton. 
Under these circumstances in Country A four tons of coal 
are equal in value to one ton of iron, but in Country B 
nine tons of coal are equal in value to one ton of iron. It 
will clearly be profitable for Country B to export coal and 
import iron, although it can produce each more cheaply 

227 



228 



THE ELEMENTS OF ECONOMICS 



than Country A . This is the same principle which makes 
it uneconomic for a man who is a good architect and also a 
good carpenter to shingle his own house, although he may 
do the work as effectively as the man whom he employs. 

The Foreign Trade of the United States. — The trade of 
the United States with foreign countries is large and con- 
stantly growing. Our domestic trade is vastly more im- 
portant yet the foreign commerce has attracted more 
attention because of having been a political issue. The 
chief imports of the United States are coffee, sugar, manu- 
factured goods, crude rubber, and gutta-percha. The fol- 
lowing table shows the values and duties of imported 
merchandise entered for consumption during the years 
ending June 30: 

VALUES 





Free 


Dutiable 


Total 


Per Cent 
Free 


1908 

1909 

I9IO 

IQII 


Dollars 
525,704,745 
599,375,868 
761,353,117- 
776,963,955 
881,512,987 
986,972,333 
1,152,392,059 
1,032,863,558 

1,495,881,357 
1,852,530,536 
2,117,555,366 


Dollars 

657,415,920 
682,265,867 
785,756,020 
750,981,697 
759,209,915 

779,717,079 
754,008,335 
615,522,722 
683,153,244 
814,689,485 
747,338,621 


Dollars 
» 1,183.120,665 
1,281.641,735 
1,547.109,137 

1,527^945,652 
1,640,722,902 
1,766,689,412 
1,906.400,394 
1,648,386,280 
2,179,034,601 
2,667,220,021 
2,864.893,987 


44-43 
46.77 
49.21 
50-85 
53-73 
55-87 
60.45 
62.66 
68.65 
69.46 

73-91 


IQI2 


I913 

I914 

IQI> 


I916 

I917 

I918 





The principal exports of the United States are given in 
the following tables. It will be noted that the chief exports 
are no longer food products: 



INTERNATIONAL TRADE 



229 





Crude Materials for 


Foodstuffs in 


Crude 






Year 

Ending 

June 30 — 


Use in Manu- 


Condition, 


and 


Foodstuffs Partly or 


facturing 


Food Animals 


Wholly Prepared 
















Value 


Per 


Value 


Per 


Value 


Per 




in Dollars 


Cent 


in Dollars 


Cent 


in Dollars 


Cent 


1908 


556,681,462 


30.34 


189,051,824 


10.30 


331,961,663 


18.10 


1909 


520.907,436 


31-80 


135,693,409 


8.28 


302,555,341 


18-47 


1910 


565,934,957 


33-IO 


109 828,320 


6.42 


259,259,654 


15-16 


1911 


713,018.206 


35-41 


103,401,553 


5-13 


282,016,883 


14.01 


1912 


723,008,839 


33-31 


99,899,270 


4.60 


318,838,493 


14.69 


1913 


731,758,513 


30.13 


181,907,266 


7-49 


321,204,373 


13.23 


1914 


792.716,109 


34-03 


137,495,121 


5-90 


293,218,336 


12.59 


1915 


510.455,540 


18.80 


506,993,179 


18.66 


454,575,404 


16.74 


1916 


535,952,043 


12.55 


380,638,102 


8.91 


599,059,151 


14.02 


1917 


731,990.339 


11.76 


531,866,009 


8-54 


737,795,334 


11.85 


1918 


897,324,082 


15-37 


374,978,216 


6.42 


1,153,702,460 


19:76 



Year 

Ending 

June 

30— 


Manufactures for 
Further Use in 
Manufacturing 


Manufactures 
Ready for Con- 
sumption 


Miscellaneous 


Total 
Value 


Value 


Per 
Cent 


Value 


Per 
Cent 


Value 


Per 
Cent 


1908. . . 
1909. . . 
1910. . . 
1911 . . . 
1912. . . . 

1913 

1914 

1915 

1916. . . . 

1917 

T918 


261,105,883 
• 231,144,267 
267,765,916 
309,151,989 
348,149,524 
408,806,949 
374,224,210 
355,862,329 

657,923,305 
1,191,262,523 

1,201,439,423 


14-23 
14. II 
15-66 

15-35 
16.04 
16.83 
16.06 
13-10 
15-40 
19-13 
20.58 


489,469,958 
440,271,747 

499,215,329 
598,367,852 
672,268,163 
776,297,360 
724,908,000 
807,465,511 
1,998,298,249 

2,942,577,415 
2,185,420,221 


26.68 
26.87 
29.19 
29.72 
30.98 
31.97 
31. II 
29.73 
46.77 
47.25 
37.43 


6,515,567 
7,783,393 
8,079,822 

7,592,542 

8,155,539 

8,531,897 

7,122,249 

80,826,502 

100,306,729 

91,672,430 

25,787,655 


2 
2 
I 


35 
47 
47 
38 
38 
35 
31 
97 
35 
47 
44 


1,834,786,357 

1,638,355,593 
1,710,083,998 
2,013,549,025 
2,170,3x9,828 
2,428,506,358 
2,329,684,025 
2,716,178,465 
4,272,177,579 
6,227,164,050 
5,838,652,057 



Balance of Trade. — ^A country which exports in value 
a greater quantity than it imports is said to have a favor- 
able balance of trade. It was once thought ^hat a favor- 
able balance of trade was always good for a country but 
economists have shown the fallacy of this. Exports for 



230 THE ELEMENTS OF ECONOMICS 

the most part pay for imports, differences in value only 
being paid by shipments of money. It may happen that 
a country has a favorable balance of trade and this favor- 
able balance merely pays the interest on debts which are 
owed to people residing in other countries. Egypt has a 
favorable balance of trade, but it owes so much to other 
countries that the difference between values of exports and 
imports goes to pay its debts. England brings in more 
than she sends out. However, she does not have to pay 
money for the excess. Profits on her investments abroad, 
interest upon money lent to foreign borrowers and earn- 
ings of British ships account for the excess of imports over 
exports. , • 

If two countries trade with each other and each has a 
gold monetary standard with no great difference in their 
international debts, exports of gold will pay differences 
in the balance of trade. Continued imports of money 
into a country will cause prices to rise and purchases by 
foreigners will decrease until the. favorable balance is 
destroyed. If money leaves a country on account of an 
unfavorable balance of trade, prices will fall and exports 
will be encouraged. These forces will tend to make ex- 
ports and imports balance, when the circumstances are 
as given. 

Payment of International Obligations. — Most interna- 
tional debts are settled, not by the shipment of money, 
but by drafts or bills of exchange. A person in New York 
who wishes to pay for goods bought in London will go to 
a. banker oi broker and buy a draft on London. The 
price of bills of exchange varies with demand and supply. 
If many merchants in London desire billr. of exchange on 



INTERNATIONAL TRADE 



231 



New York and few have accounts payable in New York, 
the price will rise. In normal times the English pound 
sterling is worth $4,866 in United States money. The 




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A FOREIGN BILL OF EXCHANGE 



Bills of exchange are issued in duplicate and each part sent by different boat. 
When one part is paid the other becomes valueless. Bills of exchange may be 
purchased from large American banks payable in the leading cities of the world. 

expense of shipping $4,866 in gold to London is normally 
less than .03, so if exchange were more than $4,896 it 
would pay to ship gold rather than purchase a bill of 
exchange. 



232 THE ELEMENTS OF ECONOMICS 

The currency of all the great countries has been inflated 
as a result of the war, and this, together with great loans 
made to European powers, used chiefly to purchase sup- 
plies in America, and a balance of trade throughout the 
war in favor of America, has made foreign exchange ab- 
normal during recent years. Shipments of gold to Amer- 
ica were made from time to time during the war, but, on 
account of the tremendous demand for American goods 
in Europe, exchange continued in favor of the United 
States. The former rates of exchange will tend to be 
restored as the European countries restore their currency 
to a gold basis and as industries in Europe recover from 
the effects of war. 

The rate of sterling, or English exchange, depends to a 
large degree upon prices in America as compared with 
prices in England. Falling prices in America attract 
European customers and add to the demand for exchange 
on New York. Rising prices here check demands for 
New York exchange in London and add to demands from 
America for goods of foreign origin. Rates of interest in 
New York, as compared to those in London, also affect 
rates of exchange. When money is more in demand in 
New York than in London, sterling exchange tends to rise. 
Many obligations in countries other than England are set- 
tled by sterling exchange. 

For example, the large export trade in coffee from Brazil 
to the United States results in a favorable balance of trade 
for Brazil, but Brazil has a constant demand for exchange 
on London. The New York coffee importer pays for his 
purchases by sending an order on London to Brazil and this 
is readily sold in Brazil. This is often called a three- 



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A COMMERCIAL LETTER OF CREDIT 



233 



234 THE ELEMENTS OF ECONOMICS 

cornered exchange. The extensive system of Enghsh 
banks throughout the world and the large commercial 
interests of English houses in every large port in the world 
have given a ready demand for sterling exchange in all 
countries. ^'Dollar exchange," or exchange sold on Ameri- 
can banks, has become more common as a result of the 
war. Branches of American banks are now to be found 
in many parts of the world, and the great demand for 
American goods has given rise to increased use of/' dollar 
exchange." 

The Edge Act and the Webb-Pomerene Act.— Credits 
for commercial purposes in the United States are seldom 
made for more than ninety days. Credits in South 
America are often made for a year, and in the devastated 
regions of Europe payments for goods are made in securi- 
ties that run for a term of years. Under the Federal 
Reserve Act and state banking acts, the American exporter 
could not accept such payments, as they could not be sold 
to bankers and he could not carry them himself, as it 
would tie up his operating capital. Now the Edge Act 
permits international banks, organized in accordance with 
its provisions, to deal in just this kind of securities. An 
exporter of American goods can now sell his goods and 
receive in payment a note due in one year. This note he 
can take to an Edge law bank and receive his money 
within two weeks. 

The Edge Act is designed to aid in financing the foreign 
trade of the United States; so the Webb-Pomerene Act 
seeks to put American exporters on a par with foreign 
exporters. In seeking foreign trade the Webb-Pomerene 
Act permits American exporters to combine. Though the 



INTERNATIONAL TRADE 235 

Sherman Act prohibits domestic combinations in restraint 
of trade, the Webb-Pomerene Act authorizes combinations 
of exporters. This is necessary if the United States is to 
have her share in the foreign markets. Foreign com- 
petitors of American trading companies have formed com- 
binations for mutual benefit; this is especially true of the 
Germans. 

There are two ways in which exporters ma}' organize to 
take advantage of the opportunities afforded by the Webb- 
Pomerene Act. 

1. Competing manufacturers may form stock com- 
panies to handle their foreign business. All matters 
relating to their foreign trade, including sales, cred- 
its, and advertising, are managed by these stock com- 
panies. 

2. Manufacturers and exporters may form associations 
for the purpose of agreeing upon a foreign policy. The 
object of these associations is to avoid competition among 
themselves and offer effective competition to foreign manu- 
facturers and exporters. 

Summary. — Foreign trade is similar to domestic trade 
in that each party to an exchange may benefit. The for- 
eign trade of the United States is large, but not as com- 
pared to our domestic trade. A favorable balance of 
trade is not necessarily good for a country. International 
debts are usually paid by bills of exchange. Exchange on 
London is called sterling exchange and is used in settling 
debts owed in various parts of the world. The Edge Act 
makes it possible for American exporters to grant long- 
time credits and has resulted in the increased use of dollar 
exchange. The Webb-Pomerene Act permits American 



236 THE ELEMENTS OF ECONOMICS 

companies to form associations through which they may 
co-operate for the increase of foreign trade. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1 . Is foreign trade or domestic trade more beneficial to a country ? 

Some say that there is only one profit in foreign trade and 
two in domestic trade. What do you think? 

2. Would a favorable balance of trade be good for Germany? 

For England? Why? 

3. Find from the financial column of a newspaper the present 

quotations of an English pound, an Italian lira, a French 
franc. Are these quotations normal? Explain the causes 
for any abnormal rates. • 

4. With what foreign nations does your city have trade relations? 

What are the leading exports and imports? 

5. Do you look with favor on the Webb-Pomerene Act ? Why not 

permit like combinations in the domestic market? 



CHAPTER XXII 
RESTRICTIONS ON INTERNATIONAL TRADE 

Tariffs. — Tariffs are duties or taxes on imports. Duties 
on imports are of three kinds: (i) Tariffs for revenue 
only, (2) tariffs primarily for revenue but with incidental 
protection, (3) protective tariffs. 

A tariff for revenue only may be levied on goods pro- 
duced outside the country and with which home products 
do not come in competition. An import duty on tea or 
coffee would be an example, or a tariff might be for 
revenue only if collected upon imported articles provided 
a similar tax be placed upon goods of the same kind pro- 
duced within the country. For example, a tariff of two 
cents an ounce might be collected at the port on imported 
tobacco and an internal revenue tax of the same amount 
be levied upon domestic tobacco. 

A tariff which gives slight protection to the domestic 
producer but is chiefly for revenue is known as a tariff for 
revenue with incidental protection. For example, a tariff 
of 10 per cent on the value of wool imported into this 
country would produce a large revenue and give slight 
protection. , 

A protective tariff is chiefly designed to protect American 
products from foreign competition. To do this the tariff 
must be high enough to raise the price of the imported 
article to the American consumer. 

237 



2^^ THE ELEMENTS OF ECONOMICS 

The Infant-Industries Argument. — The chief argument 
in favor of a protective tariff is the infant-industries argu- 
ment. A protective tariff may encourage industries for 
which the country is well suited, but which cannot be 
started without some protection against the competition 
of foreign manufacturers. Advocates of a tariff of this 
kind acknowledge that prices will be increased and that 
capital will be induced to go into the new industry which 
might, without the tariff, be more profitably employed in 
some other industry. They maintain that the ultimate 
result will justify the immediate sacrifice. The new in- 
dustry will grow under the sheltering wing of protection 
until it becomes able to take care of itself. For example, 
at one time American lace could not be produced in com- 
petition with foreign lace. A high protective tariff was 
imposed and American manufacturers turned their atten- 
tion to the making of lace, with the result that the in- 
dustry became established. 

There is much to be said in favor of protection for infant 
industries. Such protection is a temporary expedient. 
When the industry is well established, the protection may 
be removed. If the industry does not, after a time, be- 
come established, we may assume that the country is not 
well suited for this industry and the tariff should be re- 
moved. The difficulty in putting this theory into practice 
is that protected industries never reach the point when 
they regard themselves as able to get along without pro- 
tection. 

The Home-Market Argument. — In the early days of 
American protective tariffs, Henry Clay applied the home- 
market theory with great effect. Manufactures, he said, 



RESTRICTIONS ON INTERNATIONAL TRADE 239 

lead to the growth of cities. The farmer should have a 
home market for his produce, and should be spared the 
expense of long transportation. Moreover, the home 
cities would give him a market which could not be closed 
in time of war. This argument once had some force. 
Now that the home market has been created, some stu- 
dents think that the cities have been overdeveloped at 
the expense of the country. 

The War Argument. — Those who favor protection argue 
that, as a war-protective measure, this country should be 
made independent of other countries. We may take as an 
example the dependence of the United States upon the 
dyes of Germany in 1914. Not only were we without 
adequate dyes, but by-products of the dye industry are 
necessary to the making of high explosives. This was a 
serious handicap to the United States when it prepared to 
enter the war. Much is to be said in favor of such a policy 
in regard to a few industries at least until the world be- 
comes sufficiently civilized to dispense with wars. 

Closely akin to this argument is the one that a country 
cannot allow industries which were established during a 
war to perish by foreign competition. This argument has 
been raised in the United States after every great war and 
the demands, at least in part, have always been granted. 

The Tariff and Wages. — We often hear the argument 
that the American working man has a higher standard of 
living than is prevalent in other countries and that there- 
fore American employers of labor must receive higher 
prices for their products in order to pay higher wages. 
To the free trader this argument appears to be a fallacy. 
American wages are higher because the American laborer is 



240 THE ELEMENTS OF ECONOMICS 

a better producer than most foreigners. American iron and 
steel products, for example, compete in prices and quality 
with those produced elsewhere in such markets as those 
of South America, China, and Manchuria. The American 
working man is better paid, but the labor cost is no greater. 
England is nearer being a free-trade country than any 
other great country of the world, yet wages in England 
have always been higher than in Germany, which for years 
has had a high protective tariff. An employer can afford 
to pay good wages, whether the tariff is high or low, if the 
employee produces enough to justify it. We should not 
forget that the laborer is a consumer and that whatever 
increases his cost of living affects unfavorably the buying 
power of his wages. 

Most American workmen do not work in industries 
which are protected. Among the unprotected laborers 
are those in the building trades, most farmers, all railroad 
employees, firemen, policemen, domestic servants, porters, 
truckmen, and most factory laborers. Their wages are 
equal to the wages of the minority who work in factories 
having some benefit from the protective tariff. 

The Anti-Dumping Argument. — By dumping is meant 
the shipping of a surplus which cannot be sold at home at 
a profit to another country and selling this surplus for what 
it will bring. By this means prices are kept at a paying 
level in the home market. For example, English manu- 
facturers of razors might find themselves with a surplus 
which could not be sold at a profit. They do not wish to 
hold them in stock and so send them to Brazil and sell 
them at any price they can get. 

A protective tariff does not prevent dumping, though 



RESTRICTIONS ON INTERNATIONAL TRADE 241 

it makes it less common. Dumping is resorted to from 
time to time by manufacturers in all countries, our own 
included. 

A Protective Tariff Invites Retaliatory Tariffs. — If any 
country adopts a policy of protection it may expect other 
countries to retaliate. American protective tariffs on 
some of the agricultural products of Canada resulted in 
Canadian retaliation. America lost a market for some of 
her goods when she closed her markets to Canada by pro- 
tective tariffs. If all countries have protective tariffs the 
advantage to any one vanishes. 

The Protective Tariff and Monopolies. — The free trader 
sometimes says that ''the tariff is the mother of the trusts." 
The statement is not true because most monopolies are in 
industries not aided by the tariff. However, a protective 
tariff may encourage combinations among producers. If a 
protective tariff is placed upon some article, the producers 
of that article are encouraged to combine in an association 
with the object of raising the price to a point just below 
that which will enable the foreign producer to enter the 
field. For example, if watches of a certain grade can be 
produced in the United States to sell at fifty dollars each 
and the foreign producer can make them to sell at forty 
dollars, a protective tariff of 50 per cent ad valorem would 
bar out the foreign product. But the domestic producers 
would then have an inducement to combine and raise the 
price to a point just below what would permit the foreign 
producer to market his watches in America, knowing that 
at that price they would have the market to themselves. 

Sometimes articles of American manufacture can be 
bought more cheaply abroad than in the United States. 



242 THE ELEMENTS OF ECONOMICS 

This is occasionally the result of the American producer 
"dumping" his surplus goods abroad, but it is more often 
because the manufacturers have the monopoly of the goods 
in question and may charge a monopoly price, but they 
compete with foreign producers abroad and make a profit 
on their foreign sales. When such a condition exists, it 
proves that a protective tariff is not necessary or desirable 
in the industry concerned. 

Who Pays the Tariff? — Ordinarily the consumer of a 
protected article pays the tax. The tax is originally paid 
by the importer who shifts it to the wholesaler and he in 
turn shifts it to the retailer. For example, an overcoat 
valued at twenty-five dollars at the custom-house would 
cost the importer $37.50 if a tariff of 50 per cent ad valorem 
were collected. He sells it to the wholesaler for $37.50 
plus his profit, and so it goes until it reaches the consumer, 
who pays all expenses. 

However, this is not always the case. Sometimes the 
foreign producer pays the tax. If the foreign producer 
can still get a profit after reducing his price by the amount 
of the tariff, he may be inclined to do so. When England 
put a tax on the importation of American automobiles, the 
manufacturer of a popular-priced American car reduced 
the price in England by the amount of the tax. 

Protection Seldom Increases the Total Industries of a 
Country. — Usually a protective tariff merely shifts capital 
from one industry to another. For example, if a high pro- 
tective duty is placed upon a certain article which up to 
this time has chiefly been imported, capital is encouraged 
to invest in a plant for the making of that article rather 
than to seek employment in some of the established indus- 



RESTRICTIONS ON INTERNATIONAL TRADE 243 

tries of the country. Capital always seeks employment 
and goes to those industries that promise the largest 
returns. 

There are, however, cases in which a protective tariff 
actually adds to the industries of a country. The Canadian 
protective tariff resulted in several American manufac- 
turers building factories in Canada to produce goods for 
the Canadian markets. English manufacturers have in a 
like manner established branch factories in the United 
States. 

Conclusion. — It seems that the importance of the tariff 
has been greatly exaggerated because of its having been a 
political issue. The United States has prospered under 
high tariffs and under low tariffs. England has flourished 
under free trade and Germany under protection. 

Once the industries of the United States become accus- 
tomed to a certain tariff, the abundant resources of the 
country and the productive capacity of the people are sure 
to bring prosperity under normal conditions. '' Tariff" 
tinkering," as frequent changes in the tariff are called, 
slows up industry because it creates uncertainty and un- 
rest. To have a policy and keep to it for a term of years 
is better than shifting from one plan to another. 

Summary. — Tariffs are of three kinds: (i) Tariffs for 
revenue only, (2) tariffs primarily for revenue but with 
incidental protection, (3) tariffs primarily for protection. 
The importance of the tariff has been exaggerated. The 
United States has been prosperous under various tariffs. 
Germany prospered with protection and England with free 
trade. The leading arguments for a protective tariff are:' 
The infant-industries argument, the home-market argu- 



244 THE ELEMENTS OF ECONOMICS 

merit, the war argument, and the wages argument. Of 
these the infant-industry argument has the most force. 
Protective tariffs invite retahation by other countries. A 
protective tariff may promote monopoly. The duties col- 
lected at the port are, as a rule, shifted to the consumer in 
the form of higher prices. A protective tariff seldom in- 
creases the total industries of a country. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What are the effects of dumping upon the consumer? Upon 

the home manufacturer? 

2. What do you consider the strongest argument in favor of pro- 

tection? In favor of free trade? Why? 

3. Some countries give bounties to encourage home producers. 

How do bounties differ from protective tariffs in their in- 
fluence upon prices? Bounties on exports have been given 
by some countries. This would stimulate the export trade. 
Would it mean the taxing of the people of one country in 
order that the people of another country might enjoy cheap 
goods ? 

4. Show why "tariff tinkering" injures business. 

5. Has the time come when the United States should abandon 

protection? References in favor of free trade: Taussig, 
Tariff History of the United States ; Ashley, The Tariff Prob- 
lem ; Henry George, Protection or Free Trade ; Ely, Problems 
of To-day, pp. 1-86. 

References in favor of protection: Gunton, Social Eco- 
nomics, pp. 320-361; Patten, Economic Basis of Protection ; 
Stanwood, American Tariff Controversies. 

General references: Carver, Principles of Political Econ- 
omy, chaps. XXVIII, XXIX; Ely, Outlines of Economics, 
pp. 368-382; Hadley, Economics, pp. 421-445; Taussig, 



RESTRICTIONS ON INTERNATIONAL TRADE 245 

Principles of Economics, chaps. XXXVI, XXXVII; Mill, 
Principles of Political Economy, book III, chaps. XVII-XXI. 
During the Great War many plants for the manufacture of 
chemicals were established in the United States and millions 
of dollars invested in them. When the war was over the 
American producers claimed — and the claim was sound — 
that unless they were given protection the German manu- 
facturers would undersell them in America and force them 
out of business. Was it a wise policy to grant their de- 
mands ? 



CHAPTER XXIII 
MONOPOLIES 

Definition of Monopoly. — Monopoly is the absence of 
effective competition. It is characterized by abiHty to 
fix prices. Mere size does not constitute monopoly. The 
great department stores in our cities compete with one 
another fully as energetically as the small dealers. 

It is not necessary that a monopoly should have complete 
control of the supply. It may fix prices of an article if it 
controls a large proportion of the supply. The Standard 
Oil Company has never been the only company engaged in 
any part of the oil business, yet, because it has controlled 
from 80 to 90 per cent of the supply of petroleum products, 
it has been able to fix prices. 

Monopoly Prices. — Monopoly price is the price that 
yields the largest profits. This price will vary from time 
to time. The street railroads are monopolies in almost all 
American cities. A few years ago a five-cent fare was 
almost universal; even where such a rate was not fixed by 
law it was in force because such a fare was most profitable 
to the corporation. Since the war a five-cent fare no 
longer yields the largest net return and in some places 
results in a loss. Hence there has come a demand for a 
higher fare by the street-railroad corporations. 

Under the conditions given in the following table a five- 
cent fare would result in the largest profits, but conditions 
may change. Labor might become more expensive. Supplies 

246 



MONOPOLIES 247 

ILLUSTRATION OF THE LAW OF MONOPOLY PRICE 



Street Railroad 
Fares 


Number of 
Passengers 


Gross 
Income 


Fixed 
Charges 


Operating 
Expenses 


Net 
Income 


10 cents 

8 " 

7 " 

6 " .., 

5 " 

4 " • • 


500,000 
800,000 
1,000,000 
1 ,400,000 
2,000,000 
2,100,000 


$50,000 
64,000 
70,000 
84,000 

100,000 
84,000 


$25,000 
25,000 
25,000 
25,000 
25,000 
25,000 


$15,000 
16,000 
17,000 
19,000 
22,000 
22,000 


$10,000 
23,000 
28,000 
40,000 
53,000 
37,000 



of all kinds might rise in price and even the fixed charges 
might become greater through the necessity of paying more 
interest on new issues of bonds. Under these new con- 
ditions the average person would think no more of ten 
cents than he had previously thought of five. 

The following table illustrates the prices at which the 
largest profits could be obtained: 



Rate of Fare 


Number of 
Passengers 


Gross 
Income 


Fixed 
Charges 


Operating 
Expenses 


Net 
Income 


5 cents 

6" " 

7 " 

8 " 

9 " 

10 " 

11 " 


2,000,000 
2,000,000 
2,000,000 
1,900,000 
1,800,000 
1,700,000 
1,500,000 


$100,000 
120,000 
140,000 
152,000 
162,000 
1 70,000 
165,000 


$40,000 
40,000 
40,000 
40,000 
40,000 
40,000 
40,000 


$45,000 
45,000 
45,000 
45,000 
45,000 
42,000 
40,000 


$15,000 
35,000 
55,000 
63,000 
73,000 
88,000 
85,000 



If unrestricted by its charter as to fares and there were 
no limit to fares by law, the company would charge ten 
cents, but if the legal rate were five cents it would com- 
plain that such a rate was in the nature of confiscation 
and would demand the privilege of charging a higher rate. 



248 



THE ELEMENTS OF ECONOMICS 



Classification of Monopolies. — Monopolies have been 
classified by many economists, but none seems so satis- 
factory as that of Professor Charles J. Bullock, from whose 
work* the following is in part an adaptation: 

f Exceptional artists, 
Monopolies of Personal Ability { singers, surgeons, 

I etc. 



f Monopolies secured 
Private { by patents and 
copyrights. 



Legal Monopolies < 



Monopolies < 



Public < 



Natural Monopolies 



Capitalistic Monopolies 



Fiscal — like the to- 
bacco monopoly 
of France. 

S e r V i c e — 1 i k e th e 
United States 
postal system. 

f Monopolies of loca- 
tion. 
Monopolies on ac- 
count of the na- 
ture of business. 



Personal Monopolies. — Personal monopolies may result 
from very exceptional personal ability. An opera-singer 
may surpass any other at any given time and will command 
an unusual price for his services. Surgeons of unusual 
ability, as well as actors and even business men of re- 
markable talent, have monopoly powers. Such monopolies 
are not of great importance, as acquired powers are not 
transmitted to descendants. 

Private Legal Monopolies. — Privileges were, in olden 
times, granted by sovereigns to their favorites. These 

*Introduction to the Study of Economics, pp. 313-318. 



MONOPOLIES 249 

often consisted in giving them monopolies to sell certain 
objects. Monopolies of this kind were especially common 
in the time of Queen Elizabeth and her immediate suc- 
cessors. So great was the opposition to private monopo- 
lies that a law of 1624 forbade them except in case of 
patents for inventions or for new processes. 

No person may be given exclusive pri^'ilege in the 
United States to manufacture and sell an article unless he 
has obtained a patent or copyright. 

Patents. — Patents may be issued in the United States 
to ''any person, native or foreign, who has invented or 
discovered any new and useful art, machine, manufac- 
ture, or composition of matter, or any new and useful 
improvement thereof, not known or used in this country, 
and not patented or described in any publication in this 
or any foreign country, before his invention or discovery 
thereof, and not in public use or on sale for more than two 
years prior to his application, unless the same is proved 
to have been abandoned, may, upon payment of the fees 
required by law and other due proceedings had, obtain a 
patent thereof." When protected by a patent the inventor 
or discoverer has the exclusive right to manufacture and 
sell the article for a period of seventeen years, unless the 
article has been patented abroad previously, in which case 
the American patent ceases with the expiration of the 
foreign patent. 

Patents have been the cause of many monopolies in the 
United States; even when the patent expires the original 
company has control of the markets. The patent laws of 
the United States are justified because they are presumed 
to stimulate inventions. Some criticise this argument by 



250 THE ELEMENTS OF ECONOMICS 

stating that inventors would be as active without any 
patent laws; it is, however, doubtful whether the research 
and experiment necessary to perfect a valuable invention 
would be given without the possibility of obtaining a 
patent. Another argument is that it would be difficult to 
induce any one to invest in the machinery necessary to 
produce a new article unless some protection were given. 
The objection that the inventor frequently makes little 
out of his patent, the lion's share going to the manu- 
facturer, is not impressive. It is not the fault of the law 
if inventors make poor bargains with manufacturers. 

Another objection is that patents may be purchased by 
some company engaged in producing a similar article by 
another process and may never be used. This may be 
prevented by a law providing that a patent shall expire 
unless it is utilized within a reasonable time, say five years. 

Copyrights. — The author or publishers of a book may 
secure a copyright. This gives exclusive privilege to pub- 
lish the book for a period of twenty-eight years and the 
copyright may be renewed for fourteen years. Without 
such protection any one could publish a rival edition of 
a successful book and the author would be deprived of 
profits. Pictures may be copyrighted and so may draw- 
ings. 

Privileges of copyright are extended to trade-marks. 
This creates no monopoly, but protects the public from 
unscrupulous dealers who might try to take advantage of 
another's reputation, gained by years of honest endeavor. 

Public Legal Monopolies. — Public legal monopolies are 
of two kinds: (i) Social service monopolies, (2) fiscal 
monopolies. A social service monopoly is one that is 



MONOPOLIES 251 

maintained for the advantage of the pubHc without being 
primarily conducted for revenue purposes. The postal 
service is an example of this kind of monopoly. 

Fiscal monopolies are those operated by the govern- 
ment for the purpose of the revenue which they produce. 
France, for example, permits no competition with the 
State manufacture and sale of tobacco. The tobacco 
business is operated to make money for the State and the 
results are not different from what they would be if the 
same revenue were obtained by taxes on tobacco. 

Natural Monopolies. — Natural monopolies may be divi- 
ded into two classes: (i) Natural monopolies by reason of 
location, (2) natural monopolies on account of the nature 
of their business. 

Natural Monopolies of Location. — Some localities have 
such advantages over others as to constitute a monopoly. 
The best point from which to view Niagara Falls from the 
American side is Prospect Point, and before the State of 
New York acquired this site, a very considerable revenue 
was obtained by the private company which controlled it. 
The ownership of the sources of supply, like the mineral 
springs at Saratoga (now owned by the State of New 
York), may give a monopoly. A good example of such a 
monopoly is the British corporation which controls the 
diamond-mines of South Africa. The anthracite coal 
monopoly of Pennsylvania is due to the ownership of the 
sources of supply by a few large corporations. 

If the owners of the sources of supply use their monopoly 
to exact an unreasonable price from consumers, there is no 
question of the right of the government to regulate prices 
in the interest of the public. 



252 THE ELEMENTS OF ECONOMICS 

Natural Monopolies by Nature of the Business. — These 
monopolies may be divided into two classes: (i) Local 
monopolies, (2) general monopolies. Local monopolies are 
concerned with furnishing such public utilities as water, 
gas, electricity, and street-railroad transportation. Gen- 
eral monopolies furnish such services as railroad trans- 
portation, telegraph, and express service. The telephone' 
is chiefly local, though not exclusively so. In all these 
lines of business, competition tends to disappear and 
monopoly to take its place. 

The Water Monopoly. — ^The advantages of monopoly in 
supplying water for a city are obvious. One system of 
pipes and reservoirs may be installed and operated more 
cheaply than two. Unnecessary duplication of plants costs 
money, which must finally be paid by the public in in- 
creased rates. Even though one company is given com- 
plete monopoly in .one part of the city and another com- 
pany has another part of the city, there is a duplication of 
storage facilities. The question of private versus public 
ownership and operation is still an open one in regard to 
most public-service monopolies, but not with regard to 
water-supply. It has been settled in favor of public own- 
ership and operation. A pure and abundant water-supply 
is a necessity for every city and it must be secured at 
whatever cost. A revenue from the water-works is the 
last thing to be considered; the lives of the citizens are im- 
periled if money-making is a chief consideration. Most of 
the large cities in America own and operate their water- 
works. 

Gas and Electric Service. — The gas and electric services 
of almost every city in the United States are monopolies. 



MONOPOLIES 253 

Competition, if established, leads to consolidation. The 
frequent occurrence of the words ''consolidated," ''union," 
and other words of similar meaning in the names of gas 
companies,, shows that they were formed through the 
amalgamation of competing companies. The unnecessary 
duplication of plants must be paid for by the consumer. 
In passing upon the legality of rates for gas and electric 
service, as fixed by legislative enactment or a public-ser- 
vice commission, the courts consider that a corporation is 
entitled to a fair return on the capital invested. Attempts 
at competition increase unnecessarily investments of capi- 
tal and make prices higher than they otherwise might be. 
The story is everywhere the same: Two companies exist- 
ing at the same time will compete and make a low price; 
neither can make money. In a short time one sells out to 
the other, or they consolidate under a new name and in 
the end the public pays the bill. 

The Telephone Business. — Though the telephone busi- 
ness is a natural monopoly, the tendency toward consolida- 
tion is not quite so strong as is the case with other natural 
monopolies. Competition exists in hundreds of towns and 
cities, including a few large ones, but the public is better 
served by a monopoly. Where there are two telephone 
companies serving the same district, much saving would 
result through consolidation. One company could do all 
the business and save by reducing the expense for ex- 
changes, wires, and employees. 

Two telephone systems are inconvenient. It frequently 
happens that the person wanted has only the service of the 
rival line. Commercial houses must subscribe to both 
lines with the added expenses not only of the second line, 



254 THE ELEMENTS OF ECONOMICS 

but the space required and the extra help that must be 
employed. 

Street Railroads. — The street railroads show the same 
tendency toward consolidation as seen in other natural 
monopolies. Monopoly saves much in salaries of officials, 
in economy in furnishing power from one or two large 
power plants instead of several small ones, in the elimina- 
tion of unnecessary parallel lines. 

Public versus Private Ownership of Natural Monopo- 
lies. — The question of public versus private ownership of 
those natural monopolies which are the result of conditions 
inherent in the business, making competition self-destruc- 
tive, is one of the great economic problems of our day. 
Advocates of municipal ownership present arguments like 
the following: 

1. Private ownership is expensive. Immense losses 
result from unwise attempts at competition. 

2. A municipality being free from any possibility of 
competition may charge a lower rate and will be operated 
in the public interest rather than for private gain. 

3. Much corruption in politics comes through private 
corporations seeking franchises and other privileges from 
city officials. By increasing the powers of municipal 
governments, a greater interest in municipal affairs will be 
created and a better class of men will be elected to office. 

4. The success of municipal ownership, chiefly in 
Europe, is cited as a reason for extending the policy of 
municipal ownership. 

5. It is claimed that experience with private owner- 
ship shows that nothing less than municipal ownership 
and operation can protect the interest of the public. 



MONOPOLIES 255 

6. Public ownership and operation would prevent the 
periodic strikes, which under private operation have been 
costly and annoying to the public. 

Against municipal ownership and operation the following 
arguments are advanced: 

1. The cities do not conduct their present activities 
with that degree of efficiency which would justify an exten- 
sion of their powers. Public business undertakings are 
almost always conducted at greater expense and with less 
efficiency than private undertakings. 

2. Public ownership in the United States would result 
in more spoils for the politicians. 

3. The cities would not make profits, but would lose. 
The large revenue now coming to the cities through taxa- 
tion of private companies would cease, and if there were 
apparent profits they would not equal the losses in tax- 
ation. 

4. Private ownership is more progressive. The pri- 
vately owned telephone, gas, and street-railroad lines of 
the United States are superior in service to the municipal 
plants of European cities. 

5. Public regulation as to rates and quality of service 
can gain all the advantages of public ownership without 
its disadvantages. 

6. Strikes are not unknown under pubHc ownership. 
Public Control of Natural Monopolies. — If natural 

monopoHes are to be private property, they must be sub- 
ject to public control. Such control is now exercised by 
public-service commissions in most American states. Such 
rules as the following are recommended: 
. I. Franchises should be granted for a limited term, 



2 56 THE ELEMENTS OF ECONOMICS 

usually not exceeding twenty-five years and the city 
should be paid for every franchise granted. 

2. The possessor of a franchise should be protected 
against any attempt at competition by having an exclusive 
right to furnish service within the city or a part of it. 

3. Quality and prices should be regulated by law. 

4. Financial accounts of the corporations should be 
matters of public record. 

5. When the franchise expires, all rights should revert 
to the city. 

Limits to Regulation of Prices. — It is unwise to en- 
deavor to compel a corporation to furnish a service below 
the cost of production. No corporation can secure funds 
for improvements or long continue to give adequate ser- 
vice unless it can pay expenses and make a reasonable 
profit. 

The Fourteenth Amendment to the Constitution of the 
United States reads in part: "Nor shall any State deprive 
any person of life, liberty, or property, without due proc- 
ess of law." This clause has been invoked chiefly to 
prevent state legislative bodies from depriving corpora- 
tions of their earning power by fixing prices below a reason- 
able figure, though the common view when it was enacted 
was that this amendment was parsed to protect the newly 
emancipated slaves. Corporations are ''artificial persons" 
in the meaning of the law and as such are entitled to pro- 
tection under the Fourteenth Amendment. In 1909 the 
Supreme Court of the United States decided that a state 
law fixing the price of gas in New York City at eighty 
cents a thousand feet was constitutional. In arriving at 
this decision the court held that the New York Consoli- 



MONOPOLIES 



■:)/ 



dated Gas Company was entitled to a return of 6 per cent 
— that being at the time the customary rate of interest in 
New York — on the value of its property. Several other 
decisions of the Supreme Court indicate that a legislative 
body cannot fix prices below a "reasonable" rate and that 
a reasonable rate means a rate which will provide for meet- 
ing expenses and yield a fair return on the investment. 

The Supreme Court of the United States handed down 
two important decisions on April ii, 1921, both of which 
denied to municipalities the right to fix rates for services 
rendered by corporations at less than enough to pay 
expenses and yield a reasonable profit. The first case 
affirmed a decree of the Texas district court enjoining 
the City of San Antonio from enforcing a five-cent fare 
over the lines of the San Antonio Public Service Company. 
In appealing from the decision of the Texas court, the 
city asserted that its franchise contract with the railroad 
called for service at five cents and that the courts were 
without jurisdiction to interfere. 

The second case set aside an injunction obtained from a 
lower court by the City of Fairfield, Iowa, restraining the 
Iowa Electric Company from increasing its rates above 
those set in its franchise. 

It is good law therefore as well as good economics to 
say that no corporation can be expected to furnish a ser- 
vice at less than cost, including a fair return on the capital 
invested. 

Railroad Monopolies. — In the chapter entitled "Trans- 
portation," we have seen how the railroads of the United 
States were consolidated into great systems. In 1906 
there were seventeen of these systems controlling 176,000 



258 THE ELEMENTS OF ECONOMICS 

miles of railroad, out of a total of 228,000 miles. The 
more important systems were the Vanderbilt group (21,333 
miles), the Hill group (21,303 miles), the Pennsylvania 
group (20,182 miles), the Harriman group (19,182 miles), 
the Morgan group (17,810 miles), and the Gould group 
(16, 902 miles).* 

Railroad consolidations were brought about by pur- 
chase, ownership of a controlling interest in shares, or by 
lease. Each section of the United States was served by 
one of these groups and there was no competition. The 
transcontinental and great trunk lines had agreements 
with each other that prevented competition on long-dis- 
tance hauls. To remedy abuses the Interstate Commerce 
Commission was created. 

The Transportation Act of 1920. — This act originated a 
new policy in dealing with the railroads. It recognizes 
that they are monopolies and treats them as such. The 
Interstate Commerce Commission, increased to eleven 
members by the act, expressly permits pooling of freights 
and division of profits among the railroads. It does more. 
It requires the commission to prepare and adopt, as soon as 
practicable, a plan for the consolidation of railroad proper- 
ties of the continental United States into a limited number 
of systems. The act authorizes the railroads, with the 
approval of the commission, to consolidate their properties 

* These names were not used officially. The Vanderbilt group, for 
example, included the following railroads: New York Central and Hudson 
River; Lake Shore and Michigan Southern; New York, Chicago, and St. 
Louis; Michigan Central; Delaware and Hudson; Cleveland, Cincinnati, 
Chicago, and St. Louis; Chicago and Northwestern; Chicago, St. Paul, 
Minneapolis, and Omaha; Fremont, Elkhorn, and Missouri Valley; Dela- 
ware, Lackawanna, and Western; Lake Erie and Western; Pittsburg and 
Lake Erie; Indiana, Illinois, and Iowa. 



MONOPOLIES 259 

or any part of them. The commission is authorized to 
fix rates so that the companies may receive a fair return 
on their investments. 

Government Control of Railroads. — ^The arguments in 
regard to government ownership of railroads do not differ 
from those given in the discussion of municipal monopolies 
and set forth in the chapter devoted to transportation. 
The Transportation Act of 1920 shows that the immediate 
policy of the United States will be private ownership of 
railroads subject to government control. The chief fea- 
tures of the Act of 1920 are: 

1. Strong government control. This includes fixing of 
rates and preventing all discrimination. No one may 
receive lower rates or better service than another, nor 
shall one city receive lower rates than another similarly 
situated. 

2. Railroads engaged in interstate business are for- 
bidden to issue stock or bonds or other securities without 
obtaining the consent of the commission. 

3. Rates are fixed so that railroad companies may 
receive a fair return on their investments. This will 
attract private capital and enable the railroads to secure 
money for necessary improvements and equipment. 

Trusts, or Capitalistic Monopolies 

What is a Trust? — The original trust was the Standard 
Oil Trust. It was formed in 1882 by several companies 
placing their stock in the hands of nine trustees who man- 
aged the business of the constituent companies. This 
plan of organization was called a trust. Between the 



26o THE ELEMENTS OF ECONOMICS 

years 1882 and 1890 many combinations of business cor- 
porations were formed on the trust plan. The trust plan 
became illegal with the passage of the Sherman Anti- 
Trust Law of 1890, but the word ''trust" came to be 
applied to any combination or monopoly. Professor 
Lippincott suggests that there is logical sequence in the 
developing of the use of this term. It was at first used 
in a legal sense, applying to stocks placed in the hands 
of trustees. Since these trusts were combinations of 
business enterprises, the term began to be applied to all 
combinations whether formed on the trust plan or other- 
wise. Then, since combinations were usually formed to 
create monopolies the term began to be applied to monopo- 
lies of all kinds. 

The term trust, or capitalistic monopoly, is used by 
economists as applying to monopolies that are not natural 
monopolies, but are the result of vast capital controlled 
by a few persons. For example, the making of cameras is 
not a business which naturally becomes a monopoly, but 
it may become a monopoly by some great corporation 
getting control of all the manufacturing plants which make 
cameras. 

Anti-Trust Laws. — Public sentiment was against trusts, 
and in 1888 the platforms of both great political parties 
contained anti-trust planks. The Sherman Anti-Trust 
Act of 1890 followed. This act declared all combinations 
in restraint of trade illegal. Most of the states passed 
similar acts. 

The Standard Oil Trust, the American Tobacco Com- 
pany, and several other combinations were prosecuted and 
required to dissolve. They promptly reorganized under 



MONOPOLIES 261 

other forms and their control of business was in no way 
lessened. The first anti-trust laws were directed against 
the form of organization. Recently more attention has 
been given to methods of doing business. 

In 1 9 14 the Clayton Act was passed. The chief pro- 
visions of this act are: 

1. Certain business practices are declared illegal. 
These include giving favors to one purchaser which are 
denied another under similar conditions. Selling goods to 
a dealer on condition that he will not purchase any goods 
from a competitor is pronounced illegal. 

2. Interlocking directorates, or having the same direc- 
tors in competing companies, is prohibited to companies 
engaged in interstate commerce if the capital of these 
companies exceeds $1,000,000. 

3. One company cannot acquire the stock of a com- 
peting company. 

4. Combinations of laborers and farmers are exempted 
from the provisions of the act and may not be prosecuted 
under the Sherman Act. 

The Federal Trade Commission Act of 19 14 provided a 
commission of five persons to be nominated by the Presi- 
dent. This commission has the power to investigate any 
case of unfair competition and may order any person or 
corporation to desist from unfair competition. The com- 
mission has authority to present cases of unfair competi- 
tion to the courts for trial. 

Summary. — The absence of competition constitutes 
monopoly. Monopoly does not necessarily imply exorbi- 
tant prices. Prices are arranged under monopoly to give 
the largest possible profits. Personal monopohes exist 



262 THE ELEMENTS OF ECONOMICS 

when a person has unique abiUty. An opera-singer may 
receive a monopoly price for his services. Such monopolies 
never last long, as acquired powers are not transmitted 
to descendants. Patents and copyrights create monopo- 
lies for a limited time. Natural monopolies exist either 
because of control of the source of supply or because of 
the nature of the business conducted by a corporation. 
Natural monopolies should be recognized as monopolies 
and competition should not be encouraged. The public 
may either own and operate natural monopolies or permit 
private companies to own and operate them, subject to 
public control. 

Capitalistic monopolies should be subject to such con- 
trol as will prevent unfair competition. A company is not 
an evil because it is large, nor a blessing because it is 
small. The Clayton Act and the Federal Trade Com- 
mission are designed to prevent unfair competition. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What persons whom you know possess monopoly ability? 

What persons of whom you have heard receive large fees or 
salaries because of the possession of unusual ability? 

2. Do private companies or the city own the water- works which 

supply your city with water? Is the service satisfactory? 

3. Do you favor city ownership of the street railroads of your 

city ? Why ? 

4. What objections are there to the granting of railroad passes to 

private individuals? to pubHc officials? 

5. Do the electric railroads of your vicinity compete with the 

steam railroads? Do automobile trucks compete with rail- 
roads? What has been the effect? 



CHAPTER XXIV 
RENT 

Definition of Rent. — The word ''rent,'' as used by most 
persons, refers to a sum of money paid for the use of any 
article. The economist limits rent to payment for the 
use of land. Money paid for the use of capital is interest, 
not rent. Economic rent is the income which land affords 
as its share in the production of wealth. ' 

Some lands are more fertile than others. We may 
imagine land so poorly suited to raising wheat that the 
crop will merely pay the cost of labor, seed, and interest 
on the capital. This land would be the margin of cultiva- 
tion for wheat. There would be nothing for rent. On an- 
other piece of land the same amount of labor and capital 
will pay all expenses and afford a surplus of fifteen bushels 
per acre. The difference is not due to superior use of labor 
and capital, for we have assumed they are equal in each 
case. The superiority of the land accounts for the larger 
yield. Location makes some lands better than others. 
Land which is near a market is better than distant lands. 
Advantage of location is frequently great enough to over- 
come advantage of fertility. For example, the soil in the 
Red River Valley of North Dakota is superior to the soil 
of eastern Long Island, but Long Island land commands 
larger rents because of proximity to New York City. 

The rent of agricultural land, it is seen, depends upon 
two things: fertility of the soil and proximity to market. 

263 



264 THE ELEMENTS OF ECONOMICS 

It should be noted that economic rent exists whether the 
land is cultivated by the owner or is leased to a tenant. 

Land on the Margin of Cultivation. — ^Any piece of land 
is capable of many uses. The tendency is to put the land 
to that use for which it is best suited. Land near a city 
will be used for truck farming because this employment of 
the land pays best. More distant lands will be more 
profitably employed in raising wheat or general farming. 
The point where it is a matter of indifference to the farmer 
whether he engages in truck farming or general farming is 
the margin of cultivation for truck farming. There is rent 
afforded for this marginal land when devoted to truck 
farming, because it must pay as much for truck farming as 
it would pay if devoted to general farming. The poorer 
lands used in general farming may be used for grazing. 
These lands must afford the same rent for agricultural 
purposes that they would yield if devoted to grazing. 

It is seen that economic rent consists of two elements — 
marginal rent, or the rent paid for the poorest land actu- 
ally used for any purpose, and differential rent, which 
measures the difference between marginal land and better 
lands. 

Is There "No-Rent Land"? — Economists speak of "no- 
rent land." This land is too poor to produce more than a 
bare living. The cultivator of /'no-rent land" can only 
support himself and therefore there is nothing left for rent. 
There are such lands in cultivation, even though better 
lands are idle. This is because of the ignorance, shiftless- 
ness, or lack of ambition of the farmer. 

Rents of Agricultural Lands Do Not Affect Prices. — ^Let 
us imagine an island in the Southern Seas. The land of 



RENT 



265 



this island is most fertile in the north and regularly declines 
in fertility as we approach the south. Along comes Robin- 
son Crusoe and takes possession of a part of the most fertile 
land, which is capable of yielding forty bushels of wheat 




to the acre. The land is free and no rent is paid. Soon 
Friday lands and occupies an adjoining strip of land. Still 
no rent is paid as there is abundance of equally fertile land 
unoccupied. So long as there is demand for only that 
amount of wheat that can be raised on the best land and 
there is still a portion of the best land to be had for the 



266 THE ELEMENTS OF ECONOMICS 

asking there will be no rent. But the population grows 
and soon the best land is all occupied and there is demand 
for more wheat than can be raised on the best land. If the 
cost of production is eighty cents per bushel on the land 
which produces forty bushels to the acre, the thirty-bushel 
land will not be used until the price of wheat rises to about 
$1.07 a bushel, because the same amount of labor and 
capital is required to produce thirty bushels on the poorer 
land as would produce forty bushels on the best land. As 
soon as. the price of wheat rises enough to make it profit- 
able to cultivate the thirty-bushel land, the better land 
will command a rental of ten bushels to the acre, because 
a farmer could as well afford to pay ten bushels rent for 
the best land as to raise thirty bushels on the no-rent land. 
Moreover he would have superior social advantages on 
the better land as he would be near Crusoeville where there 
is a general store, a school, a church, and ''movies" on 
Saturday night. 

In like manner when the demand for wheat exceeds 
180,000 bushels a year, the price of wheat will rise until 
it becomes profitable to cultivate the twenty-bushel land 
and now the forty-bushel land will afford a rent of twenty 
bushels per acre and the thirty-bushel land will command 
a rent of ten bushels per acre. From the illustration it is 
seen that prices are not high because rent is paid, but rent 
is paid because prices are high. 

Do Agricultural Rents Always Rise? — It might be 
thought that rents of agricultural land will continually rise 
as population increases. Such is not the case — new and 
rich agricultural lands may be opened to cultivation. 
These will raise the margin of cultivation and tend to 




From photographs by Brown Brothers. 

A CITY APARTMENT-HOUSE AND A SUBURBAN HOUSE 

The apartment -house will accommodate seventy families without overcrowding. 
It does not pay to erect such apartment-houses except where land rents are high. 

267 



268 THE ELEMENTS OF ECONOMICS 

lower rents. Improvements in the science of agriculture 
may make lands productive which were once thought 
useless. Swamps may be drained and dry lands may be 
made productive by irrigation. Rents of agricultural land 
in New England have fallen with the opening of rich 
western land and it no longer pays to grow wheat in New 
England. 

Urban Rents. — ^Location is the one thing that affects rents 
in cities. The land in the centre of the city always com- 
mands the highest rents. The centre of the city is always 
devoted to business. Some portions are more desirable 
than others and for this reason rent for larger amounts. 
If you were considering opening a clothing store in a city, 
you might find that the best available location would re- 
quire $20,000 a year rent for the land. Another piece of 
land might be rented for $5,000 a year. The $20,000 plot 
might be the better bargain because the sales would much 
exceed those that could be made in the cheaper section of 
the city. Ten thousand sales at an average profit of $5 
per sale in the better location would yield a gross return 
of $50,000. After paying $20,000 rent there would be left 
$30,000. Out of this sum perhaps $5,000 would be taken 
for the services of clerks who would not be required in the 
cheaper location. In the cheaper section of the city 2,000 
sales at a profit of $5 per sale might be made. This would 
produce a gross return of $10,000, and after paying rent 
there would be only $5,000 left. It is seen from the above 
illustration that high rents do not necessarily mean high 
prices. 

Within the business section of a city, rentals vary from 
place to place. The business which can afford to pay the 



RENT 269 

highest prices gets the best locations. Outside the busi- 
ness portion of the city lies a belt which may be used for 
manufacturing, trade, or residences. This belt may be 
regarded as the margin for purposes of trade. Near the 
railroads or water are the best sites for manufacturing. 

Rents for residence purposes differ with the demand for 
land in each section. Land used for poor tenements may 
command a high rent because of the income which may 
be obtained from such tenements. Land in the fashionable 
section of the city will yield high rent because people are 
willing to pay high prices for it. On the other hand there 
may be ^^ no-rent land" on the outskirts of the city where 
"squatters" are living on land in- little hovels of their 
own construction and from which the owners of the land 
do not take the trouble to evict them because for the 
present there is no profitable use to which the land may 
be put. 

Changes in Urban Rents. — Rent of urban lands does not 
continually rise as is often supposed. Changes in lines of 
transportation and changes in the population of a section 
of a city may cause rents to fall. The erection of a jail or 
a hospital often depresses the value of adjoining land. The 
building of the Brooklyn Bridge caused rents to fall in 
sections of Brooklyn that had been on lines of communica- 
tion with the ferries and caused rents to rise on the new lines 
of communication with Manhattan Island. New suburbs 
made available by new means of transportation may cause 
rents to fall in certain residential sections of a city. 

Summary. — Economic rent is the payment for the use 
of land, mines, water-power, or other natural agents of 
production. Two items enter into the rent of agricultural 



2 70 THE ELEMENTS OF ECONOMICS 

land. They are fertility of the soil and location. The 
poorest land actually used for raising any agricultural 
product is the margin of cultivation for that product. 
There may be rent paid for the use of this poorest land or 
it may be no-rent land. The rent of better lands varies 
with the advantages they afford. Rent is not the cause of 
high prices of farm products, because poorer lands are not 
cultivated until rise in prices makes it profitable to till 
these lands. Rents of agricultural lands do not always 
rise with increase of population as the margin of cultiva- 
tion may be raised by new and fertile lands being opened 
to cultivation. Rents of city lands depend wholly upon 
location. The rents of these lands depend upon what 
people are willing to pay for them for business purposes or 
for residences. High rents for stores do not necessarily 
mean high prices. Rent of urban lands is measured by 
the degree of superiority of the land in question over the 
poorest land devoted to the same use. Rents of urban 
land rise or fall with changes in the desirability of such 
land. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Do you know of any "no-rent land" in your community? 

Have there been any recent changes in rental values in your 
city ? What has caused these changes ? 

2. Some retail dealers advertise that they can sell goods cheaper 

than others because they pay less rent. Are such claims 
always well taken? Are they sometimes true? Explain. 

3. What portions of the business section of your city rent for the 

highest amounts? Why? Why are rents on one side of a 
street sometimes higher than those on the opposite side? 



RENT 271 

4. Ask some old resident of your city what was the fashionable 

part of your city for residence purposes forty years ago. 
What changes have occurred since then? 

5. Give an example of the rise and fall of rents in urban property. 

In agricultural lands. 

6. Suppose that 60,000 bushels of potatoes are required to sat- 

isfy the wants of a small city and 10,000 bushels are sup- 
plied by one farmer. Suppose further that this farmer, 
owm'ng his own land, should decide to sell his potatoes 
without including any charge for rent and without regard 
to the current scale of prices. What would be the effect 
(i) upon other producers of potatoes? (2) upon prices? 
(3) upon supply ? • 



CHAPTER XXV 

WAGES 

Wages are the laborer's share in the products of industry. 
They are advanced by the employer before the goods are 
sold but they must finally come out of the product. Labor 
in the economic sense includes all efforts, whether of mind 
or body, devoted to the creation of wealth. The salary of 
a superintendent of a mine is a wage just as is the pay of 
a miner. Wages may vary from a hundred thousand 
dollars a year paid to a railroad president to a few dollars 
a day paid to a section-hand. 

Limits of Wages. — Since wages are paid out of the prod- 
ucts of industry, it is apparent that in the long run a 
laborer cannot receive more wages than the value he adds 
to the article he produces. The lowest Hmit of wages is 
an amount barely sufficient to support the laborer and his 
family. Should wages fall below the point of subsistence 
there will be, in the long run, fewer laborers and therefore 
wages must rise. The lower limit of wages is seldom fixed 
at the point of subsistence. Usually it is fixed by the 
standard of living. At any one time the laborers in any 
employment are accustomed to a certain amount of neces- 
saries, comforts, and luxuries. This is their standard of 
living and they will not abandon it without a struggle. 
The standard of living cannot affect wages except as it 
influences the supply of labor. So long as laborers will 
not marry unless they can maintciin a high standard of 

272 



WAGES 273 

living, wages will be high. The standard of living may 
be lowered by a succession of years of depression in indus- 
try, or by immigrants who will work for a lower wage and 
who have a low standard of living. 

The supply of labor does not rapidly change and there 
is a possibility that the children of laborers may grow up 
with a lower standard than their parents had maintained 
in more prosperous years. On the other hand, the stand- 
ard of living may rise, as it has steadily risen in the United 
States. With more education and better training, the 
laborers have a broader outlook and are better producers. 
They receive higher wages because they earn them, and 
not by reducing the shares which belong to other members 
of the community. 

Real and Nominal Wages. — The money which laborers 
receive for their services is nominal wages. Real wages 
are the goods and services which the money will buy. To 
show that nominal wages in 1920 were double nominal 
wages in 19 14 does not show that the laborers were more 
prosperous. A fall in nominal wages may be accompanied 
by a rise in real wages. 

Wages in different countries and in different parts, of the 
same country cannot be compared accurately except in 
terms of real wages. A school-teacher in New York or 
Chicago who receives $2,500 a year may receive less real 
wages than a country school-teacher who receives $1,000 
a year. 

The Demand and Supply of Labor. — ^Wages at any time 
depend upon the demand and supply of labor. Demand 
for labor is sometimes a demand for the direct services of 
labor. This is the case with personal services such as 



274 THE ELEMENTS OF ECONOMICS 

rendered by barbers, domestic servants, physicians, and 
musicians. More often it is not labor that is desired, but 
the articles which labor will produce. 

The demand for labor varies with the price of labor. At 
any one time there is a certain wage. Let the wage rise 
and demand is lessened, or let wages fall and the demand 
is increased. For example, if wages are five dollars a day, 
an entrepreneur can place goods upon the market to sell at 
a certain price. If wages rise to eight dollars a day, the 
entrepreneur must sell his goods at a higher price, which 
will reduce the demand for the goods and consequently the 
demand for labor. If the demand for the goods is elastic 
the effect upon the demand for labor is soon felt. 

When wages are high there is a tendency to supplant 
labor by machinery. For example, if farm labor is expen- 
sive, it pays to have ploughing done by a gang-plough drawn 
by a tractor. The substitution of machinery for labor, it 
should be noted, does not decrease the demand for labor in 
general, but only for a particular kind of labor at a certain 
time. The demand for labor at any one time depends 
upon the amount of capital available. If capital is scarce 
there is less demand for labor than when it is abundant. 
The economic depression in Europe following the Great 
War was chiefly because of the lack of capital. 

Time Wages. — Time wages are paid for the time spent 
in work. Time wages may be paid by the hour, day, week, 
or month. Time wages are based upon the theory that 
the average workman produces so much in a given time. 
No advantage is given to the especially efficient workman 
unless he attracts the attention of a foreman and is listed 
for promotion. Time wages tempt some workmen to do 



WAGES 275 

as little as they can without incurring the penalty of dis- 
charge. 

Piece Wages. — Piece wages are paid for the amount of 
work done. The wage is a definite payment for a definite 
service. This method of payment discourages loafing on 
the job, but there is a tendency to speed up work and the 
employer sometimes fixes piece wages at a rate that will 
give a living wage to only the most efficient. If the em- 
ployer sees that a man is making ten dollars a day, he may 
think of it as a day's wage rather than as a payment for 
ten dollars' worth of work and is tempted to cut the piece 
wage. Piece wages are objectionable if they overwork the 
employees. ''Piece-work is the work that kills" is an old 
saying. 

Rate-of-Service Wages. — There are many varieties of 
rate-of-service wages, but all include a time wage with a 
bonus for increased production. Rate-of-service wages are 
therefore a combination of time wages and piece wages. 
This is not profit-sharing because the bonus is paid for 
time saved and not out of profits. At its best this system 
provides a living wage as a base, with a bonus for increased 
efficiency. 

Non-Competitive Groups. — The workers of a country 
may be divided into five fairly distinct groups. The first 
group consists of unskilled manual laborers. Competition 
IS strong within this group, as it is easy to shift from one 
kind of unskilled work to another. Wages tend to be the 
same within the group. If wages should be higher in one 
employment than another, competition among workers for 
the higher-paid employment will depress wages. If one 
employment is underpaid as compared to another, work- 



2 76 THE ELEMENTS OF ECONOMICS 

men cannot readily be obtained in that employment and 
wages must rise. The next higher group is that of 
skilled laborers. There is no competition with the lower 
group and within this group there is less competition than 
within the group of unskilled laborers. Wages are higher 
than in the lower group, as the number of skilled laborers 
is less than the number of unskilled men. The tendency 
is for wages within the group to vary with the skill required. ^ 

The third group is composed of ordinary mental work- 
ers such as clerks, salesmen, and keepers of small shops. 
Wages in this group may be greater or less than in the 
group of skilled manual laborers. The fourth group con- 
sists of most business and professional men. Competition 
within the group is strong, but there is no competition 
with those outside of the group. The last group is com- 
posed of men of unusual ability. Because of their excep- 
tional ability they have a monopoly advantage. Great 
business men, eminent surgeons, actors of rare ability 
are among those who belong to this group. There is 
less competition within this group than within any of 
the other groups and there is little or no competition by 
members of lower groups. 

Members of a higher group may be pushed temporarily 
into a lower group by an industrial depression or some 
other unusual condition, but each man tends to remain 
within the group for which his ability and training fit himr 
Men rise from one group to another as they gain in ex- 
perience and ability. At any one time within each group 
wages depend upon supply and demand. 

Adam Smith's Reasons for Differences in Wages. — In 
his Wealth of Nations, Adam Smith gives five reasons for 



WAGES 277 

wages being different in various employments. Wages, he 
says, vary with: 

I. The agreeableness or disagreeableness of the employ- 
ments themselves. 

II. The easiness and cheapness, or the difficulty and 
expense, of learning them. 

III. The constancy or inconstancy of employment in 
them. If a trade can be followed only part of the year, 
wages must be higher than a trade that offers regular em- 
ployment throughout the year. 

IV. The small or great trust which must be reposed in 
those who exercise them. 

V. The probability or improbability of success in them. 
If success is sure the reward is small; if uncertain, those 
who succeed receive large returns. 

The causes which Adam Smith mentions operate only 
because they affect the supply of labor. They must be 
considered together and not separately. For example, a 
garbage collector does not follow an agreeable occupation, 
yet his wages are low. Adam Smith's first cause would 
seem to imply that the wages of a garbage collector should 
be high, but the four other causes show why his wages 
are low, 

Summary. — ^Land, labor, and capital co-operate in the 
production of wealth and each is entitled to a share of the 
product. . Labor cannot receive the entire product be- 
cause, in this event, capital and land would not be fur- 
nished by their owners. The share which each receives 
depends upon how much each is needed. If labor is in 
much demand wages will be high. If there is much labor 
as compared to capital and land, wages will be low. Wages 



2 78 THE ELEMENTS OF ECONOMICS 

are paid out of the products of industry. A high standard 
of living means high wages, but not necessarily high cost 
of production, because well-paid laborers produce more 
than poorly paid laborers. Real wages consist of the 
goods which may be purchased with money wages. 

At any one time wages are paid for the time employed 
in work. Piece wages are paid at so much per piece. 
Rate-of-service wages are a combination of time wages 
and piece wages. Skilled labor does not compete with 
unskilled labor nor does brain work compete with manual 
labor. Wage-earners may be divided into five non-com- 
petitive groups. The way to get high wages is to prepare 
for entrance into a group where competition is not intense. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Would you rather be a dentist, a physician, or a pharmacist? 

What preparation is needed for each profession? How do 
the hours of labor compare? How do wages compare? 
Which is held in the highest social esteem? 

2. Why do men generally receive a higher wage than women in 

the same employments ? Why do labor unions composed of 
men demand equal pay for women? 

3. Read Adam Smith's reasons for differences in wages in different 

employments as set forth in his Wealth of Nations. What do 
you think of his reasons for so many young men being 
attracted to the legal profession? 

4. What laborers in your city are paid time wages ? Piece wages ? 

How does their wage affect their efforts? 

5. How do wages in your city compare with wages five years ago ? 

What has caused any difference? Have real wages or 
nominal wages changed? 



CHAPTER XXVI 
LABOR PROBLEMS 

The Open versus the Closed Shop. — In an open shop 
there is theoretically no discrimination in the employment 
of labor. A laborer may secure employment without 
regard to his membership or non-membership in a union. 
Many "open shops" are open in theory only, as the em- 
ployers discriminate against union labor. 

A closed shop is one which employs only union labor. 
All labor unions desire the closed shop and maintain that 
without a closed shop the union cannot accomplish its 
purposes. If the labor organizations can control the sup- 
ply of labor and make it necessary for employers to engage 
union men or none at all, they can exercise a monopoly 
power and can force employers to grant any reasonable 
demands. 

The arguments in favor of an open shop are as follows: 

1. Labor organizations are a monopoly, or wish to 
become a monopoly. By limiting the number of laborers 
in certain industries, they force workmen into other em- 
ployments and overcrowd some industries. 

2. Unions interfere with the right of non-union men to 
secure employment. Most workmen in the United States 
are not members of unions and do not wish to join. The 
labor organizations try to prevent them from getting em- 
ployment or try to coerce them into joining the union. 
The closed shop is a means of oppression. 

279 



28o THE ELEMENTS OF ECONOMICS 

3. In a closed shop the unions often Hmit the amount 
of work that a man can do in a day. They slow up pro- 
duction to the injury of all members of society, themselves 
included. 

4. When labor unions control a shop they stir up strife 
and ill-feeling with employers. They interfere with the 
employer's right to run his own affairs in his own way. 

The advocates of the closed shop reply with arguments 
like the following: 

1. Labor unions have secured higher wages, better 
conditions, and shorter hours. This service has benefited 
all laborers. Employers who say they want the open shop 
really want to exclude union labor. 

2. The closed shop is essential to collective bargaining. 
Employers are bound together in associations of employers. 
Labor must be united. An individual has no chance at 
bargaining. He goes to a shop and is told that wages are 
five dollars a day. He must take it or leave it. He cannot 
bargain. Unless the union can speak for all employees, it 
loses in bargaining power. 

3. Limiting of output is sometimes desirable. Pro- 
duction may be set at too high a rate in piece-work, or 
hours may be too long in time-work. Unions do not favor 
loafing on the job. There is as much ^'soldiering" in non- 
union shops as in union shops. 

4. Labor organizations are not the causes of industrial 
strife. Strikes are not the objects of unions, but are some- 
times necessary in order to obtain justice. In an open 
shop there is less opportunity to obtain fair treatment 
than in a closed shop. 

5. The employer who says it is none of the public's 



LABOR PROBLEMS 



281 



business how his affairs are conducted is behind the times. 
The public says that he must not employ child labor, 
must keep his factory in a sanitary condition, and in other 
ways regulate his business. Labor has a right to say 
something about conditions of employment. Unorgan- 
ized labor is inarticulate. Therefore organized labor must 
speak and it cannot speak with authority except in a 
closed shop. 

The question of the open versus the closed shop cannot 
be answered except in a general way. Whether a closed 
shop is helpful or injurious depends on the union. Some 
unions have been agents of oppression, but this is generally 
the fault of dishonest leaders. If an employer tries to make 
his shop an open shop in order to force wages below the 
rate that will afford a fair standard of living and the 
unions oppose this, they are acting for the public interest. 
If the members of a union refuse to work for a man who 
employs '^scab" labor and at the same time are willing to 
admit non-union men into their ranks without imposing 
prohibitive initiation fees, there is something to be said for 
them. The non-union man may injure the cause of labor 
by working for less than a fair wage. If, however, the 
union acts as a closed corporation by excluding new mem- 
bers or imposes prohibitive initiation fees, or unreasonably 
limits the number of apprentices or in other ways fol- 
lows an oppressive policy, an open shop is best for all 
concerned. 

Strikes. — ^A strike is a concerted quitting of work. That 
men have the right to stop work either as individuals or 
as members of a union is beyond question. However, a 
strike is industrial warfare and should be undertaken only 



282 THE ELEMENTS OF ECONOMICS 

when all other efforts at redress of grievances have failed. 
Strikes injure laborers, for even if a strike succeeds it may 
be years before the advantages gained by the strike balance 
the losses incurred while the strike was being conducted. 
Just as the laborers lose wages during the strike, the em- 
ployers lose business and profits. The public is often the 
chief loser, because it is put to inconvenience during a 
strike and has to pay increased prices if the supply of a 
commodity becomes scarce. 

Resort to violence during strikes is always to be con- 
demned. However just the cause of a strike, its instiga- 
tors forfeit all claim to public support and sympathy when 
they resort to violence. Peaceful picketing, or stationing 
strikers near a shop in order to dissuade men from work- 
ing, is generally regarded as legal, though the courts have 
not always so decided. 

Sympathetic Strikes. — ^A sympathetic strike is one that 
is undertaken against an employer whose men have no 
grievance in order to force another employer to grant the 
demands of strikers. For example, there may be two 
street-railroad companies in a city. The employees of one 
line strike and after a time the employees of the other line 
strike in order that public pressure may be exerted to com- 
pel the first company to grant the demands of the men 
and end the inconvenience which the public has suffered. 
There is no apology for a sympathetic strike which injures 
an employer who has treated his men fairly. 

General Strikes. — General strikes are strikes of all the 
workmen of a district or a country. They usually are the 
result of some real or fancied grievance against a govern- 
ment. There has never been a general strike in the 



LABOR PROBLEMS 283 

United States and there is no reason to anticipate that 
there ever will be. 

Lockouts. — ^A lockout is a strike instituted by employers. 
Lockouts are usually resorted to when a strike is pending 
and the employers desire to precipitate action before the 
employees have completed their plans. 

Arbitration. — The wisdom of settling disputes by arbi- 
tration admits of no doubt. Agreements between em- 
ployers and employees sometimes provide that all disputes 
shall be settled by arbitration. Most American states have 
state boards of arbitration whose duty it is to endeavor 
to prevent strikes and if strikes occur to offer their services 
as arbitrators. The party to a dispute which claims that 
it has nothing to arbitrate usually has a weak case. Boards 
of arbitration generally consist of three persons, one chosen 
by each side and a third chosen by these two. Usually 
both sides agree to accept the decision of the arbitrators. 
The Canadian Industrial Disputes Act of 1907 forbids 
strikes or lockouts in industries engaged in furnishing 
transportation by railroads or street railroads or in in- 
dustries furnishing heat, light, or power, unless the ques- 
tions at issue have first been submitted to arbitration. 
After the board of arbitration has rendered its decision 
and the findings have been published, strikes or lockouts 
are legal. This has practically abolished strikes in Canada 
so far as they affect the industries named in the act. 

In several of the provinces of Australia compulsory arbi- 
tration is established by law and the experiment seems to 
give general satisfaction. Compulsory arbitration is not 
favored generally in the United States by either employers 
or employees and is of doubtful constitutionality. 



284 THE ELEMENTS OF ECONOMICS 

The State of Kansas, as a result of a strike in the coal 
mines of that state in the winter of 19 19-19 20, established 
a Court of Industrial Relations. This court has jurisdic- 
tion over disputes arising in industries of Kansas supplying 
the people with food, fuel, and transportation. Laborers 
in Kansas in the specified industries may secure direct and 
immediate redress of grievances without resorting to a 
strike. The Court of Industrial Relations is composed of 
three judges appointed by the governor with the advice 
and consent of the Senate. The court has the power to 
require the continuous operation of the specified indus- 
tries, which are forbidden to shut down ''for any purpose 
to affect wage controversies or the price of the commodity 
to the pubHc." Though opposed by some labor leaders, 
the law has general support in Kansas and has practically 
abolished strikes and lockouts. 

Boycotts. — ^A boycott is a refusal of a group of persons 
to purchase goods produced or sold by another person or 
group* of persons. The boycott has long been in use. 
"The aboHtionists boycotted slave-made products; the 
temperance people have used the same method to repress 
the liquor nuisance; the pulpit tried hard to boycott Sun- 
day newspapers; and recently there has been established 
in the city of New York a society, consisting of women 
occupying excellent social positions, pledged not to pur- 
chase goods of houses which do not furnish proper con- 
veniences for their saleswomen." * 

A simple boycott usually starts by working men refusing 
to purchase goods made by a person whom they consider 
unfair to union labor. The boycott may be further ex- 

* Wright, Industrial Evolution of the United States, p. 319. 



LABOR PROBLEMS 285 

tended by endeavoring to persuade others to join the boy- 
cott. A secondary boycott is one declared against a person 
who patronizes a boycotted firm. For example, a boycott 
may be declared against a street-railroad company. But 
John Doe, who is a grocer, continues to ride on the street- 
cars. Then the store of John Doe is boycotted. This is 
a secondary boycott. The courts have generally declared 
secondary boycotts to be illegal and such boycotts seem 
unjust. 

Another form of boycott is to publish an unfair list, with 
or without advice not to patronize any firm on the list. 
The courts have generally upheld actions to prevent the 
publications of such lists. However, a fair list may be 
published. The Consumers' League publishes a ''White 
List," giving the names of firms which conform to the 
standard which the league approves. 

.Child Labor Laws. — Children need play, open-air life,, 
and schooling. Selfish parents and greedy employers will 
put children to work unless prevented by law. That a 
child may prefer to work rather than go to school is no 
excuse. The child is unable to make a wise decision in 
regard to his future. There is a probability that the child 
will enter some employment that leads nowhere. His 
earnings may seem large to him at first, but in a few years 
he will be distanced by the child who remains at school. 

Laws are necessary in order to prevent child labor. In 
1 916 Congress passed an act debarring from interstate 
commerce all articles made by child labor. This act was 
declared unconstitutional and in 19 19 a new child-labor 
law was enacted by Congress. The new law prohibits the 
employment of children under sixteen years of age in mines 



286 THE ELEMENTS OF ECONOMICS 

and quarries, and of children under fourteen years of age 
in mills, canneries, workshops, and- factories. Children 
under sixteen years of age may not be employed in mills, 
canneries, or factories more than eight hours a day, more 
than six days in a week, or at night. 

The Federal law applies to only about 15 per cent of 
the child laborers of America. It is a good law so far as 
it goes; and it probably goes* as far as the Constitution 
permits. 

Most legislation to prevent child labor must be left to 
the states. In twenty-six of the states children may not 
work unless physically qualified. Most of the states have 
educational requirements, but only six of the states re- 
quire completion of the eighth grade, "which seems little 
enough to require of children who go to work under six- 
teen." 

State laws usually prohibit the employment in factories 
of children under fourteen years of age, provide for con- 
tinuation schools, prohibit night work and limit the hours 
of labor to eight or less. 

Women Wage-Earners. — Women were extensively em- 
ployed in industry before the World War, but the war 
vastly increased the number of women employees. There 
is no doubt that women will continue in industry. By 
entering gainful employments women are able to take care 
of themselves and need not marry unless they meet a man 
whom they consider worthy. The factory laws which 
have been passed to protect men against accidents and 

* Judge Boyd, in the Western Judicial District of North CaroHna, de- 
clared the law unconstitutional on May 2, 19 19. The act is in force else- 
where in the United States. 



LABOR PROBLEMS 287 

unwholesome surroundings are not sufficient to protect 
women. Laws for the protection of women should pro- 
hibit night work, require comfortable seats with backs, 
make provision for separate and proper toilet facilities, 
and prohibit a working week of more than forty-four 
hours. 

The Eight-Hour Day. — The working day should not be 
so long as to exhaust the working man nor to impair his 
health or strength. No one questions that the laborer 
should have a reasonable amount of time for his own 
use. He needs time for recreation, self -improvement, and 
social pleasures. In some employments, like agriculture, 
ten hours may not be too long for a working day. In 
others, like driving a fast locomotive, six hours may be 
enough. For factory work eight hours a day with a half 
holiday on Saturday is favored by most laborers. There 
is much to be said for the eight-hour day, but it should be 
an honest eight-hour day, not eight hours at regular pay 
and two additional hours at double pay. The advocates 
of an eight-hour day advance arguments like the following: 

1. Long hours mean over-fatigue. Accidents and dis- 
ease follow fatigue. 

2. Long hours bring moral degradation. After ex- 
cessive labor the tired worker responds more readily to 
coarse pleasures and excitements. 

3. A shorter day increases efficiency of labor and im- 
proves the output. 

4. Shorter hours lead to continuity of employment. 
When no restrictions are placed upon hours of labor in a 
seasonal industry the tendency is to concentrate the work 
in a brief season with long hours of overtime. 



288 THE ELEMENTS OF ECONOMICS 

5. Shorter hours lead to better citizenship by giving 
time for education and self-improvement. 

Summary. — One of the most important questions of our 
time is the open versus the closed shop. Chambers of 
Commerce and associations of employers are conducting 
campaigns in favor of the open shop, while the American 
Federation of Labor and labor organizations generally 
desire the closed shop. The question has been given much 
attention by the public press and by prominent men not 
identified with either labor or capital. It cannot be an- 
swered except in a general way. Some labor unions have 
used the closed shop to oppress their employers and some 
employers have used the open shop to lower wages below 
a decent standard. With a spirit of fair play on both 
sides, either an open or a closed shop may be operated to 
the benefit of all concerned. 

Strikes are a loss to all, the public included. Even if 
the strike is won, the losses in wages while the strike was 
on may more than counteract the gain. There are times 
when strikes may be necessary but they should be 
avoided if possible. During one recent year (1918) there 
were 3,181 strikes and 104 lockouts in the United States. 
Resort to violence during strikes is always to be con- 
demned. Any one who uses violence in a strike is a law- 
breaker and forfeits all claim to sympathy. 

Industrial disputes cannot always be avoided. They 
should be settled by arbitration. No one who has right 
on his side need fear the decision of an impartial board of 
arbitrators. 

The boycott is another weapon of labor, but it is a 
weapon which should be used with care, if at all. A boy- 



LABOR PROBLEMS 289 

cott often inflicts injury upon innocent people. Even 
when started as a simple boycott, the tendency to resort 
to a secondary boycott is strong. Secondary boycotts are 
always morally unjustified. Among the most important 
of labor questions is the regulation of child labor. Chil- 
dren on the farm and in the home may work a reasonable 
time each day with profit to themselves. But a factory is 
no place for a child under fourteen years of age; some 
would even say under sixteen years of age. Since some 
parents are selfish and some employers greedy and no 
child under fourteen competent to look after his own 
welfare, the government must regulate conditions and 
hours of child laborers, make provision for their educa- 
tion, and should prohibit work at night of all under six- 
teen and absolutely prohibit labor in factories and mines 
of all children under fourteen years of age. 

The eight-hour day is desired by most laborers. The 
advantages of a short labor day have been given in the 
text. However, it must be remembered that some em- 
ployments are more exhausting than others. Ten hours' 
farm work is certainly less exhausting than eight hours in 
a factory, and eight hours in a factory are less exhausting 
than six hours spent as engineer on a fast express train. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1 . Get the opinion of some employers of labor in your city on the 

open versus the closed shop. Also see what the laborers 
think about this question. 

2. If the law of a state Hmited work in the mines to eight hours a 

day and the employers of the mines were requiring the men 
to work ten hours, would the men be justified in striking? 



290 THE ELEMENTS OF ECONOMICS 

Give some instances of strikes that might be approved by 
fair-minded people. 

3. Give a history of the great strike in the anthracite coal mines 

of Pennsylvania in 1902 and show how President Roosevelt 
brought the strike to an end. 

4. "In the period 1881-1905 there occurred 36,757 strikes and 

1,546 lockouts, involving 200,000 establishments and over 
9,000,000 employees. The total direct and indirect losses 
resulting therefrom can only be guessed at, but they prob- 
ably exceeded the direct cost of any war in which the United 
States had then been engaged." — Ha worth, The United 
States in Our Own Times. 

What would you consider the indirect losses occasioned 
by a strike? 

5. Why do women in industry need more protection by the laws 

than men? 



CHAPTER XXVII 
LABOR ORGANIZATIONS 

There are many varieties of labor organizations. Among 
the more important are trade unions, industrial unions, 
and labor unions. A trade union is a labor organization 
composed of workers in one trade or in a number of allied 
trades. The International Typographical Union is an 
example of a trade union, as it confines its membership to 
those engaged in a particular trade. An industrial union 
admits to membership all laborers in one industry, even 
though they may be employed in different occupations. 
The United Mine Workers admits to membership all who 
are employed in the mining industry, whether within or 
outside the mines. A labor union seeks membership among 
all workers without reference to particular trades. The 
Industrial Workers of the World is a labor union. 

The American Federation of Labor is composed of many 
labor organizations, some of them trade unions and some 
industrial unions. The Federation gives almost complete 
local autonomy to its member organizations, but assists 
them when in trouble. Its attention is chiefly directed to 
securing legislation favorable to labor, promoting the use 
of union labels, and organizing labor in districts where it 
has not been organized. 

The Services of Labor Organizations. — ^Labor organiza- 
tions render educational, social, and economic services to 
their members. Every labor organization is a debating 

291 



292 THE ELEMENTS OF ECONOMICS 

society, and its members receive training in economic 
problems and in public speaking. Not infrequently promi- 
nent men address the meetings upon topics of general 
interest. 

Labor organizations are social and fraternal bodies. 
Dances, entertainments, and other social gatherings are 
held under the auspices of unions and are well conducted. 
The annual dance of the Longshoremen's Union might not 
appeal to the taste of people in high society, but it is the 
best-conducted dance which the members of the union 
attend. The fraternal features consist of caring for a 
member in distress and paying funeral expenses when 
necessary. The fraternal features are more prominent in 
the older organizations. The International Typographical 
Union has a sanitarium for the care of its members who 
are afflicted with tuberculosis. 

However, the chief object of labor unions is economic. 
An individual laborer is at a great disadvantage when 
disposing of his services. To an employer it makes no 
difference whether or not he employs a particular laborer, 
but it makes a great difference to the laborer. Labor re- 
sembles a perishable commodity and the laborer must dis- 
pose of his services promptly or lose his day's pay. The 
laborer is not always able to take his services to a better 
market either for lack of funds or because of home ties. 
The conditions under which he works may not be suitable 
but the individual laborer is often unable to offer an effec- 
tive protest. Labor organizations make the bargain more 
equal. Employers may not need a certain laborer but 
they need labor. Organized labor can make its demands 
as a unit and can be supported by union funds if employers 



LABOR ORGANIZATIONS 293 

fail to offer terms which are considered reasonable. Col- 
lective bargaining is one of the chief advantages of labor 
unions. The political power of labor organizations may 
be exerted toward betterment of working conditions. As 
an individual the laborer has Httle poKtical power, but as 
the member of an organization his political power may be 
greater than that of his employer. 

The Rise of Labor Organizations in the United States. — 
Although there were many labor organizations in the 
United States before then, labor organizations did not 
become important until about the middle of the last 
century. There was not much need for them. When 
good public land could be secured easily, dissatisfied wage- 
earners could take to farming and become landlords and 
capitalists. 

The International Typographical Union was organized 
in 1850, though the word '' International" was not used 
until 1869. Other unions followed, and by 1C70 there were 
about forty labor organizations in the United States. 

The Noble Order of the Knights of Labor was organized 
in Philadelphia in 1869. The Knights of Labor planned 
to include all labor in their organization. The order was 
at first secret, but this^ feature, being opposed by members 
of the Roman Catholic Church and others, was abolished 
in 1870. The Knights of Labor advocated abolition of 
speculation in land, compensation for injuries received by 
laboring men while employed, a progressive tax on incomes 
and inheritances, an eight-hour day, government owner- 
ship of railroads and telegraph lines, and postal savings- 
banks. It also expected the abolition of the wages system 
through the introduction of co-operative factories managed 



294 THE ELEMENTS OF ECONOMICS 

and owned by working men. The organization num- 
bered about 100,000 workmen in 1885. In this year 
the Knights conducted a successful strike against the 
Gould railroad system, which resulted in an increase of 
membership to 600,000 in 1886. The strike of 1885 was 
memorable because of the introduction of sabotage, though 
the name was of later origin. The particular kind of 
sabotage employed was the disabling of locomotives by 
removing vital parts. The strike of 1885 was won by 
violence, and, though it immediately resulted in increased 
membership, it ultimately wrecked the order. Radicals 
got in control and ordered unnecessary and unwise strikes. 
As a result the Knights lost support. 

In October, 1886, the Knights of Labor declared war on 
the American Federation of Labor. From this time its 
decline set in and the order disappeared in the late nine- 
ties. 

The American Federation of Labor. — The American 
Federation of Labor was organized in Pittsburgh in 1881, 
though the name was not adopted until 1886, at a conven- 
tion held in Columbus, Ohio. The unit of representation 
in the American Federation of Labor is the national union, 
local unions not being represented unless they have no 
national organization. Samuel Gompers was elected presi- 
dent in 1886, an ofhce which he has held — with the excep- 
tion of one year — to the present time. The federation has 
avoided meddling in politics and has steered clear of radical 
and revolutionary theories. This policy has been success- 
ful and its membership in 192 1 was over 4,000,000. The 
American Federation of Labor from its beginning has 
favored an eight-hour day and has insisted upon the prin- 



LABOR ORGANIZATIONS 295 

ciple of collective bargaining. At the annual convention 
held in Atlantic City in 1919 a program was adopted 
including the following demands:* 

National legislation to prevent child labor; 

State and national regulation of corporations; 

Government ownership of docks and wharfs; 

No employment agencies to be operated for profit; 

PubHc-service utilities to be owned by the government 
or to be regulated by the government in the public interest; 

Public aid in home-building and housing; 

Restriction of immigration; 

Right of public employees to collective bargaining; 

Equal pay for equal work by men and women; 

Opposition to militarism; 

jPublic ownership of waterways and water-power. 

The Industrial Workers of the World. — ^The Industrial 
Workers of the World was organized in Chicago in 1905. 
This was a merger of several radical labor groups which 
opposed the American Federation of Labor because the 
Federation was regarded as too conservative and because 
it had neglected the unskilled laborers. The I. W. W. 
seeks to organize all the workers of each industry into 
''one big union" and to unite these unions in oiie great 
national organization. The I. W. W. is opposed to the 
wages system and cares nothing for bargaining with capi- 
tahsts; it declares that the aim of labor should be to pos- 
sess the industrial plants of the country and operate them 
for the benefit of the workers. The I. W. W. therefore 
advocates what is called syndicalism in Europe and this 

* For a summary of this ^program, see Mary Beard's American Labor 
Movement, pp. 163, 164. 



296 THE ELEMENTS OF ECONOMICS 

is a form of socialism. During the Great War the I. W. W. 
was disloyal in word and deed, and as a result their leader, 
W. T>. Haywood, was convicted of violating the espionage 
act. The order lost in membership and reputation and is 
now relatively ununportant. 

The Loyal Legion of Loggers and Lumbermen. — The 
lumber industry of the Northwest was once a stronghold 
of the I. W. W. Conditions of labor were far from what 
they should have been and the lumber camps offered a 
fertile field for radical organizers. Nowhere were the 
excesses of the I. W. W. more in evidence than here. 
Now all is changed through the efforts of the Loyal Legion 
of Loggers and Lumbermen. This organization, familiarly 
known as the 4LL is a new type of labor organization. 
The unit of membership is a local and all persons working 
for the same employer may be members of the local as 
can the employer himself. 

The employer, superintendent, foreman, skilled laborer, 
common laborer, and clerk, are all welcome to membership 
and are equal in the organization. The initiation fee is 
one dollar and the dues are twenty-five cents a month. 
Employers contribute a sum equal to that of all the mem- 
bership dues of their employees who are members of the 
Legion. An employer also files a bond as a guarantee that 
he will abide by the rules of the order. All questions of 
wages, hours of labor, and conditions of labor are settled 
by elected representatives of all members of the industry. 
There is an ''employees' conference committee," consisting 
of a chairman, vice-chairman, and secretary of the local. 
It is the duty of this committee to confer with the operator 
or the operator's agent on all differences of local concern 



LABOR ORGANIZATIONS 297 

and to endeavor to settle these differences in a manner 
satisfactory to all parties. There is a distinction between 
'' matter of local concern" and ''questions of general im- 
port." The former are all "questions affecting the living, 
working, and recreation conditions of each local," un- 
warranted discharge of laborers, and the like. ''Questions 
of general import" are those affecting the industry by 
districts or as a whole, such as wages and hours of labor. 
Superior to the conference committee of the local is the 
district board. There is a district board in each of the 
twelve districts into which the lumber region of the Pacific 
Northwest is divided. 

The district board consists of four employees, two mill- 
men and two loggers, chosen by the employees of the dis- 
trict. The decision of the district board is final on matters 
of local concern. If the district board cannot reach a 
decision the case is referred to the board of directors. 

The board of directors is the highest court of appeal of 
the Legion. It is composed of the employees' district 
board chairmen of each district and the operators' district 
board chairmen. This board settles all appeals and 
"matters of general import." In an article published in 
the Atlantic Monthly (February, 192 1), Professor R. P. 
Boas says: 

"The Legion has accomplished six distinct things. It 
has made calm and steady production possible in an in- 
dustry which three years ago was thoroughly disorgan- 
ized. It has placed wages on the highest scale in the 
United States for the work done, and has established the 
eight'hour day. It has stabilized wages on a minimum 
uniform scale, with an allowance for reward for superior 



298 THE ELEMENTS OF ECONOMICS 

skill and initiative. It has made striking progress in im- 
proving sanitary conditions in the industry. 

''The sanitary officer reports substantial improvements 
in conditions. A general clean-up has taken place in 
84 per cent of the operations. Eighty-six per cent of the 
camps have bathing facilities. . . . The forty-eight com- 
plaints of bad sanitary conditions made in 19 19 were all 
adjusted. It has begun, through an organization of the 
wives of the 4LL men, called the Ladies Loyal Legion, the 
development of the community life of the lumber camps 
and mill towns. At last reports, nearly thirty locals had 
been organized. Finally, it has been carrying on a persis- 
tent campaign of education among employers and em- 
ployees in the spirit of harmony, co-operation, and fair 
play." 

Summary. — ^Labor organizations have become an im- 
portant factor in modern industry. Through organization 
laborers have received socialand educational advantages, 
but the economic interests have been more important. 

The American Federation of Labor is the largest labor 
organization in the world. Its members, with few excep- 
tions, are loyal to America and do not seek to overthrow 
our institutions or to regard themselves as the only persons 
worthy of consideration. 

The I. W. W. was formed in 1905 by a merger of several 
radical groups of working men. It is socialistic in its 
teachings and methods. It makes war on the present 
industrial order and does not hesitate at sabotage and other 
illegal acts. On account of its record of disloyalty during 
the war, it has declined in numbers and is now of little 
influence. 



LABOR ORGANIZATIONS 299 

The Loyal Legion of Loggers and Lumbermen, recently 
organized in the lumber regions of the Pacific Northwest, is 
a new type of labor organization. It includes employers 
as well as employees among its members and seeks the 
common welfare. Through its influence wages have been 
increased, working conditions improved, and industrial 
peace has prevailed where warfare was the rule when the 
same regions were strongholds of the I. W. W. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Which of the demands of the American Federation of Labor as 

given in this chapter do you approve? Why? Do you 
disapprove of any? Why? 

2. What labor organizations exist in your city? What have they 

done to better the lot of working men? 

3. What arguments can be made against labor organizations? 

Are these arguments valid? 

4. Labor organizations among women have not, as a rule, been so 

successful as among men. Give some reasons for this fact. 

5. A prominent labor leader in New York City was recently sent 

to the state prison at Sing Sing. His chief offense was in 
holding the menace of strikes over employers and compelling 
them to pay him in order to escape from strikes. How can 
labor organizations avoid such leadership? 



CHAPTER XXVIII 
INTEREST 

Why Interest is Paid. — Interest is a sum of money paid 
for the use of money or capital. Usually interest is re- 
garded as a return for the use of money. Much more 
frequently money is not desired, but the goods which it 
will purchase are desired. For example, a manufacturer 
borrows $10,000 with which to buy machinery and pays 
interest at the rate of 6 per cent a year. With the aid of 
the machinery he can produce goods which will pay all 
expenses and yield him a profit. Interest is paid for the 
use of capital, therefore it goes to the owner of capital, 
whether he puts it to work or lends it to another. 

Sometimes capital is borrowed directly. A man may 
hire a building, machinery, or a truck. The payment for 
such a loan is popularly called rent, but it is really interest. 
Rent is defined by economists as payment for the use of 
land; the payment for the use of capital is interest. When 
capital is borrowed in the form of material instruments of 
production, these goods must be returned in as good con- 
dition as when borrowed, or the owner is entitled to pay- 
ment for depreciation. Interest does not pay for depre- 
ciation. 

Interest as a Reward for Waiting. — Capital has been 
defined as that part of the product of industry which 
is used to produce more goods. Capital is the result of 

300 



INTEREST 3or 

saving. The owner of wealth has two options; he may 
consume it, or he may put it to work. If he puts it to 
work, he sacrifices present pleasure for a future reward. 
Most people prefer present goods to future goods and so 
a premium has to be paid to induce them to forego present 
enjoyment. This reward for waiting is interest. No one 
wishes to part with $i,ooo to-day merely on the assurance 
that he will receive $i,ooo a year from to-day. The guar- 
antee or even the belief that he will get back his $i,ooa 
with $60 interest at the end of the year induces him to 
make the loan. 

Pure and Gross Interest. — Pure or net interest is the 
amount paid for the use of capital when there is no risk 
of loss. The interest on bonds of the United States is. 
pure interest. Every one knows that both principal and 
interest on these bonds will be paid. Loans made to 
private persons have an element of risk. The individual 
may fail in business or may die. Loans to corporations, 
are not without risk. The corporation may become bank- 
rupt. No one will loan where risk is taken unless he re- 
ceives some compensation for the risk. The greater the 
risk the greater the compensation demanded. 

The Rate of Interest. — The rate of pure interest is fixed 
by demand and supply. If capital is in demand, rates of 
interest will rise and this will encourage savings. For 
example, when the rate of interest is 4 per cent, capital is. 
not in much demand. Some people will consider 4 per cent 
an inducement for savings — to others it is not a sufhcient 
inducement. Let the rate of interest rise to 6 per cent 
or 7 per cent and savings increase. It is apparent that 
at any time the rate of interest is higher than necessary to 



302 THE ELEMENTS OF ECONOMICS 

induce many people to save. It is just enough to satisfy 
persons who would spend their savings if the interest rate 
were lower. These persons are known as the marginal 
savers. 

Long and Short Time Loans. — ^Loans for a year or more 
are long-time loans. What is wanted in long-time loans 
is capital, not money. Interest on long-time loans does 
not vary with the amount of money in circulation. For 
example, if the amount of money in circulation is such that 
a piece of machinery can be bought for $10,000, a 6-per- 
cent rate of interest will produce $600 a year. If the 
amount of money in circulation is doubled and other 
things remain the same, $20,000 will be required to buy 
the machine and a rate of 6 per cent will return the lender 
$1,200 per year, which will be equivalent to $600 when 
the purchasing power of money was twice as great. 

With short-time loans, or more particularly demand 
loans, the rate of interest varies with the amount of money 
in circulation. If a man borrows money and pledges 
stocks as security and must pay the loan or lose his stock, 
he wants money and he will have to pay for it according 
to the amount of money available. The great market is for 
demand loans or "call loans," as they are usually desig- 
nated. A call loan is payable on demand. It is secured 
by stocks or bonds and is almost always made by a bank 
or broker. The rate of interest on call loans differs from 
day to day and has no relation to the rate of interest on 
long-time loans. Under the law of New York call loans 
may yield any rate of interest without becoming usurious. 
"Call loans" are chiefly confined to those trading on the 
stock exchanges. 



INTEREST 303 

Usury Laws. — Exorbitant or illegal interest is called 
usury. All the states except Colorado, Maine, and Massa- 
chusetts (except on loans less than $1,000) have laws fix- 
ing a maximum rate above which interest charges cannot 
legally be collected. The penalty for usury in some of the 
states is merely the loss of the excess of interest, in others 
it is the loss of all interest. Only in Arkansas, New York, 
and California, is the penalty a heavy one. In the two 
former states the penalty is loss of both principal and 
interest and in California the penalty is I500 fine or im- 
prisonment, or both. Usury laws are not always enforced 
and are often evaded by charging a "bonus" for making 
a loan or charging an excessive sum for legal services, such 
as the drawing up of papers. The usury laws are for the 
protection of borrowers and. are presumed to protect them 
against lenders who would take an undue advantage of 
their need for money. The usury laws do afford some 
protection and are valuable in fixing the rates of interest 
to be allowed on funds in the custody of the courts. 

Interest Not the Only Inducement to Saving. — The 
desire to profit by savings is a great inducement to thrift. 
It is not the only inducement. There would be savings if 
there were no such thing as interest. The conviction that 
future income will be less than present leads people to 
provide for the future. A thousand dollars that now might 
be spent on luxuries may at some future time be needed for 
necessities. Wise people would save even if they had to 
rent a safe-deposit vault or pay a bank for keeping their 
money. 

Summary. — Interest is paid for the use of capital. The 
owner of wealth may consume it or may put it to work. 



304 THE ELEMENTS OF ECONOMICS 

If he puts it to work there is a sacrifice of present pleasuie 
for future reward. From one point of view interest is a 
reward for waiting. Gross interest includes payment for 
risk. There is no risk in lending money to the United 
States, but in lending money to most persons or corpora- 
tions there is an element of risk. The owner of capital 
must be paid for the risk he is taking or he will not part 
with his funds. 

The rate of pure interest varies with demand and supply. 
If there is a great demand for capital, the rate of interest 
will rise. A rise in the rate of interest induces more people 
to save and thus increases the amount of capital. 

Generally, capital is desired by borrowers and not 
money. But in short-time loans money is often wanted. 
Call loans are payable on demand and the rate of interest 
varies with the demand and supply of money. The rate 
of interest on long-time loans does not var}^ with changes 
in the amount of money in circulation. 

Although interest is an inducement to saving, prudent 
people would save even if there were no such thing as 
interest. Savings provide for future wants. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

I. Aristotle said that interest is immoral since money does not 
beget money. In Aristotle's time there were no oppor- 
tunities to invest money such as exist to-day, and borrowers 
of money generally sought loans in order to provide funds 
for meeting some misfortune. Interest was also condemned 
by the church in the Middle Ages. Show why interest is 
moral now. Show the modern difference between interest 
and usury. When may a high rate of interest be immoral? 



INTEREST 305 

2. Why is the rate of interest for loans secured by mortgages on 

farm lands higher in North Dakota than in New York? 

3. Some socialists would abolish interest. What would be the 

result of the abolition of interest? 

4. Savings-banks, as a rule, paid to depositors 4 per cent during the 

year 1 920-1 921. A larger rate of interest could be secured 
by investing in Liberty Bonds or in stocks and bonds of 
many corporations. Why should any one deposit money in 
savings-banks under these circumstances? 

5. What are the advantages of the postal savings-banks in en- 

couraging savings ? 

6. Some parents think that school savings-banks are not worth 

while. Do you agree with them ? Why ? What may be 
the benefits of school savings-banks? 



CHAPTER XXIX 

PROFITS 

Nature of Profits. — Rent, wages, and interest must be 
paid before the organizer of a business can get any return 
for himself. In other words, they are expenses of produc- 
tion. After all expenses are paid, whatever remains is 
profits. The person who organizes a business may or may 
not take an active part in conducting that business. If 
the organizer furnishes his own capital, uses his own land, 
and himself conducts his business, he must deduct interest, 
rent, and wages for himself before he can consider that he 
has made a profit. 

The Entrepreneur as a Risk Taker. — The entrepreneur 
is the person who is responsible for conducting a business. 
If the business succeeds he receives profits; if it fails he is 
the loser. For example, a man decides to open a creamery. 
He secures capital, rents land, constructs a building, hires 
men, and begins to operate the creamery. If the business 
succeeds he makes profits. His was the risk and his is the 
reward. 

The work of the entrepreneur may be divided between 
two or more men. In this case the form of organization is 
usually a partnership or a corporation. Every member 
shares the risk and receives a part of the profits, even 
though the active manager of a business may not be a part 

306 



PROFITS 307 

owner and may receive a salary. The wages of the man- 
ager depend upon profits. He will not retain his position 
unless there are profits. What is paid to the business 
manager may be considered wages and is often called 
wages of superintendence, or may be considered necessary 
profits, since the business must produce enough to pay for 
such services. 

The Nature of Business Risks. — In all business there is 
risk. There may be unfavorable weather, a war, strikes, 
an epidemic, a fire, a business depression, or a number of 
other calamities that affect business. For example, in 
farming there are drought, frost, insects, and blights. 
These are risks. Again it may be difficult or impossible 
to secure labor. Prices for produce may be so low as to 
fail to meet expenses. On the other hand, through a com- 
bination of favorable conditions, the farmer may make 
exceptional profits. Although the prudent farmer antici- 
pates risks and provides against them, risk can never be 
wholly eliminated. 

In the manufacture and sale of clothing, fashions may so 
change as to favor one line of goods at the expense of 
another, or stocks may be held in excess of demands. 
Every business has its risks. Since risk-taking is necessary 
to the conducting of business, it is a legitimate hazard and 
has nothing in common with gambling. Nothing is added 
to the wealth of a country by gambling. Those who take 
risks are constantly adding to industry. 

Classes of Entrepreneurs. — Entrepreneurs differ in 
ability. The highest class is composed of men of great 
abihty with keen powers for analyzing business condi- 
tions, who see opportunities and are not afraid to follow 



3o8 THE ELEMENTS OF ECONOMICS 

their judgment. Marshall Field, A. T. Stewart, Stephen 
Girard, H. H. Flagler, F. W. Woolworth, J, J. Hill, and 
Cyrus McCormick are examples of such entrepreneurs. 
The large profits these men made were not the results of 
good fortune but were chiefly the result of rare business 
ability. 

A second class of entrepreneurs is composed of men of 
ability, but not of genius. This is a much larger class than 
the first one. A successful business man, who has built 
up a large department store would be an example of this 
class. 

To the third and most numerous class belong most busi- 
ness men. Except under unusual conditions, their profits 
are not large. Such men can generally secure the same 
income whether managing their own business or working 
for another. 

Differential Profits. — Some business enterprises pay 
merely expenses. They continue in operation either be- 
cause their capital is of such a nature that it cannot be 
diverted into another business or because there is a pros- 
pect of a change for the better in the future. Many 
street railroad companies during the war operated at a 
loss, but they could not discontinue business without 
destroying their capital and they hoped for better con- 
ditions. 

Business enterprises whose capital may be diverted to 
more paying uses will not operate long unless they can 
pay all expenses and yield sufficient profits to make it 
worth while to continue. These enterprises are on the 
margin. A business which yields more than marginal 
profits may be said to have differential profits. Good 



PROFITS 309 

managerial ability is a prime factor in differential profits. 
A good business man must see that purchasing is done to 
advantage as well as selling; he must have his place of 
business advantageously situated; he must know when 
credit can be granted and when withheld; must see that 
machinery is properly used and that the employees do 
their work well. Whether a business man does these 
things himself or hires others to do so for him does not 
change responsibility. 

Extraordinary Profits. — ^A new line of industry which 
produces something for which there develops a great de- 
mand may for a time yield extraordinary profits. The 
first bicycle manufacturers in the United States were very 
successful. Every one wanted to ride. Prices were high 
and demand exceeded supply. Extraordinary profits sel- 
dom last. Others go into the business, and supply is in- 
creased and prices fall. The unusual profits in the bicycle 
business lasted only a few years. Some monopolies, on the 
other hand, may yield high profits indefinitely. The 
Standard Oil Company has produced unusual profits since 
the time of its organization. 

Extraordinary profits may result from an increase in the 
price of goods. If a dealer has on hand sugar purchased 
at six cents a pound and the price rises to twenty-five cents 
he will have extraordinary profits. Of course extraordi- 
nary losses would follow if the course of events were the 
opposite. 

War Profits. — In many lines of business profits increased 
very greatly during the World War. The following table, 
taken from Professor David Friday's Profits, Wages and 
Prices, shows these profits: 



3IO 



THE ELEMENTS OF ECONOMICS 
NET INCOME OF ALL CORPORATIONS 



Year 


Net Income 
Before Taxes 


Federal 
Taxes 


Net Income 
After Taxes 


1909 

1910 


$3,125,481,000 
3,360,251,000 
3,213,706,000 
3,832,151,000 
3,710,600,000 
5,184,400,000 
8,765,900,000 
10,730,360,000 
*9, 500,000,000 


$20,960,000 

33,512,000 

28,583,000 

35,006,000 

39,145,000 

56,973,000 

171,805,000 

2,142,446,000 

*3, 200,000,000 


$3,104,521,000 
3,326,739,000 
3,185,123,000 
3,797,145,000 
3,671,466,000 
5,127,427,000 
8,594,095,000 
8,587,914,000 

*6, 300,000,000 


1911 - . . . 

1912 


1914 

1915 

1916 

1917 

1918 





* Estimated. 

The figures given above show that the highest profits 
were in 191 7. Since that year they have been declining 
War industries, which brought large profits, ceased with 
the armistice, but high profits continued until 1921. Dur- 
ing and after the war the profits of various industries 
differed widely. The net earnings of national banks, as 
reported to the comptroller of the currency, increased 
from $160,980,084, or 9.06 per cent of capital and surplus 
in 1913, to $194,321,000, or 10.52 per cent in 1917, and to 
$212,332,000, or 11.09 P^r cent, in 19 18. The earnings of 
mining and manufacturing companies in 191 7 were reported 
as 330 per cent higher than 1913, which was itself a pros- 
perous year. The reports of mercantile establishments 
show greater profits than in any line of business, except 
mining and manufacturing. Public service corporations 
failed to make satisfactory profits, because their expenses 
were increased while the charges for the services they ren- 
dered, fixed by law, remained the same or were slightly 
increased. 



PROFITS 311 

The popular opinion that extraordinary profits were 
earned during the war is justified by the facts. The war 
brought about conditions which made prices increase more 
rapidly than the rise in wages and the cost of materials. 
Great demands from Europe for goods of all kinds 
and the transformation of thousands of industrial plants 
from production of goods for the civilian population 
to production of munitions of war resulted in many cases 
in a shortage of supplies. In cases where there was no 
shortage the people thought there was or would be, and 
the effect was the same as an actual shortage. Hoarding 
of goods by speculators added to the difficulty. Under the 
circumstances every one wanted to buy and prices steadily 
rose. Monopoly conditions existed in most industries and 
prices were fixed at the rates which would bring the largest- 
returns, the only exception being those goods whose prices 
were regulated by law. 

From the experience, not only of the United States but 
also of other belligerent and neutral nations, it may be 
said that the ordinary economic forces which limit profits 
are suspended in times of great wars and most industries 
find it possible to charge monopoly prices. These con- 
ditions remain until war conditions cease and industries 
return to peace conditions. 

Summary. — Profits are a surplus after all the expenses of 
a business have been paid. All business has risks. The 
entrepreneur is a risk-taker. He must make profits or lose 
his position. Entrepreneurs differ in abihty. Those who 
have unusual ability may produce unusual returns in the 
form of differential profits. Extraordinary profits may 
result from industries which supply some new article, or 



312 THE ELEMENTS OF ECONOMICS 

through fortunate purchases. Except in case of monopoly 
extraordinary profits seldom last long. The World War 
brought about exceptional conditions and there were un- 
usual profits to many. With a return to peace conditions 
profits gradually became normal. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. The Woolworth Building in New York City, called "The 

Cathedral of Commerce," was built from the profits of five 
and ten cent stores. The profits on each sale were small 
but there were millions of sales. Why could Mr. Woolworth 
be regarded as an entrepreneur of exceptional talents? 

2. Russell Sage once remarked that the secret of making money 

in stocks and bonds is in buying when every one else wants 
to sell and selling when others want to buy. Why do so 
many people want to buy at certain times ? What were the 
results of the mania for buying sugar during the Great War ? 

3. What effect did the Great War have upon the profits of the 

street railroads of your city ? Why ? 

4. What lines of business yielded extraordinary profits during the 

Great War? Why? 

5. Why do profits tend to be the same in all industries? What 

prevents the rate of profits from being the same? 



CHAPTER XXX 
SOME PROPOSED RADICAL ECONOMIC CHANGES 

The Single Tax. — In the year 1879 Henry George pub- 
lished Progress and Poverty. His main object was to 
show that rent tends to increase while profits and wages 
tend to diminish. Progress and poverty, he maintained, go 
hand in hand. To remedy the alleged evil, he advocated 
a single tax on land which would be equal to the rent of 
the land. All other taxes were to be abolished. The re- 
sults, he thought, would be to ''raise wages, increase the 
earnings of capital, extirpate pauperism, abolish poverty, 
give remunerative employment to whoever wishes it, afford 
iree scope to human powers, lessen crimes, elevate morals 
and taste and intelligence, purify government, and carry 
civilization to nobler heights." 

His arguments in favor of the plan were twofold. In 
the first place he affirmed that land is a natural product 
and not the result of labor, and that every person has a 
natural right to the occupation of land. ''Let the parch- 
ments be ever so many, or possession ever so long, natural 
justice can recognize no right in one man to the possession 
of land that is not equally the right of all his fellows." 
"Though his titles have been acquiesced in by generation 
after generation, to the landed estates of the Duke of 
Westminster the poorest child that is born in London has 
just as much right as has his eldest son. Though the 
sovereign people of the State of New York consent to the 

313 



314 THE ELEMENTS OF ECONOMICS 

landed possessions of the Astors, the puniest infant that 
comes wailing into the world, in the squalidest room of 
the most miserable tenement house, becomes at that 
moment seized of an equal right with the millionaire." 

The quotations given above illustrate the natural-right 
claims made in Progress and Poverty, They are not argu- 
ments but statements of opinion. To the natural-right 
opinion a conclusive answer is that private property in 
land exists because it is regarded as beneficial to most 
people. In order to show that private property in land 
should be abolished, it must be proved that some other 
plan would be better. Henry George tries to prove this 
by three main arguments: 

1. Rent is an "unearned increment." The owner of 
land need merely hold his land and benefit by the rise in 
rent. This rise in rent is not due to any labor on the part 
of the owner, but is due to growth in population and to 
public improvements. It is therefore just and fitting that 
society should take what it creates. An example of "un- 
earned increment" is afforded by the Astor property in 
New York City. John Jacob Astor, early in the nine- 
teenth century, invested his earnings in land on Manhattan 
Island. His descendants now enjoy annually millions of 
dollars of income from this land. 

2. A second argument is that if land were taxed to its 
full rental value, every one owning land would be obliged 
to use it or abandon it to others who would use it. No 
land could be held for speculative purposes. Not only 
would land be thrown open to use, but a tax that would 
take all rent would result in compelling landlords, who 
live wholly upon the proceeds of rent, to engage in some 



PROPOSED RADICAL ECONOMIC CHANGES 315 

useful occupation and would thus increase production of 
wealth by abolishing an idle class. 

3. The final argument is that a single tax on land would 
stimulate all industry through abolishing all other forms 
of taxation. This, we are told, would result in such general 
prosperity as to abolish poverty. 

Arguments against the Single Tax. — Those who oppose 
the single tax upon land say that such a tax would be un- 
just. It would destroy the selling value of the land and 
thus deprive the landowner of his property without his 
consent. The man who has invested $2,000 in a lot for 
his home would find himself deprived of the value of his 
investment, but his neighbor who has invested $2,000 in 
the stock of some monopoly would pay nothing in taxes on 
his investment. 

Another objection is that land is not the only thing that 
yields an unearned income. A fortunate investment in 
the stock of some corporation may result in a profit of 
several hundred per cent. This is an "unearned incre- 
ment" and it would not be fair to tax one "unearned incre- 
ment" and let another go scot-free. Then, again, land does 
not always rise in value. It sometimes falls. Changes in 
the character of the population, the building of a hospital 
or jail, or changes in lines of transportation are among the 
causes which lower the value of land. This lessening of 
value may be called "an unearned decrement," and the 
owner of land which has fallen in value might claim that 
he is entitled to compensation for his loss. 

It should also be remembered that the rise in the value 
of land is not entirely an "unearned increment." The 
land policy of the United States has been to encourage 



3i6 THE ELEMENTS OF ECONOMICS 

actual settlers upon the public domain, and the United 
States has given the settlers the land, or sold it to them for 
small payments, in order that the country may grow. 
The settlers cleared the land and made great sacrifices in 
the hope of future reward. Some of them did reap the 
rewards of their sacrifices, but some did not. Where suc- 
cess was obtained, the land was usually improved by its 
owner. Draining swampy land or fertilizing sterile land, 
or clearing away stones and underbrush, is increasing the 
value of land by labor, and labor is entitled to its reward. 

The single tax would be unwise because it would make 
impossible other desirable taxes. For example, a protec- 
tive tariff might be desirable, or a tax on inheritance might 
be considered a suitable method of limiting inheritances. 

A most serious objection to the single tax lies in its 
inelasticity. . The returns from a single tax on land might 
be expected to rise in an advancing community, but there 
is no way in which such a tax would meet the demands for 
an increased revenue which would be occasioned by war 
or the need of some great improvement. 

Anarchism. — ^AU exercise of authority is objectionable 
to the anarchist. He would abolish government and the 
present methods of business whether conducted by indi- 
viduals, associations, or by the government. He assumes 
that men would do what is right if all compulsion were re- 
moved. This is not true. There are persons in every 
community who must be restrained from evil actions. 
Anarchy would bring about a reign of terror, in which the 
strong would profit at the expense of the weak, and the 
depraved would do as they pleased. The anarchists think 
that, compulsion being removed, men would unite in co- 



PROPOSED RADICAL ECONOMIC CHANGES 317 

operative groups for the production of wealth and would 
share the proceeds among themselves in a manner mutu- 
ally satisfactory. However, unless men were perfect, there 
would be sure to arise disputes in regard to the amount of 
work each should perform and in regard to the share each 
should receive. Nor would any one care to work unless 
he could be sure that there was some guarantee that he 
could retain property after he had secured it. Contrary 
to general opinion, there are some peaceful anarchists, who 
regard anarchy as a possibility in the far-distant future. 
The dangerous anarchist, who advocates violence in over- 
throwing all governments, is an enemy of society and must 
be suppressed as such. 

Communism. — Communists desire the common owner- 
ship of capital and equal distribution of the proceeds of 
mdustry among the workers. Long ago Aristotle said 
that a fatal objection to communism is that the business 
of all is the business of none. Any economic system that 
does not reward people in proportion to their abilities and 
industry can never succeed. 

There have been many communistic experiments in 
Europe and America. Most of them have failed and the 
survivors are destined to fail. Some have failed because 
their founders had peculiar religious beliefs and when the 
founders died their children refused to accept the faith of 
their fathers. Others failed because their members could 
talk communism but found it irksome to practise it. 
However, the chief reason for failure is that communism 
is not satisfactory to most people at any time and does 
not long prove satisfactory to any but a few. 

Among the many communistic experiments in America, 



3i8 THE ELEMENTS OF ECONOMICS 

that organized in 1848 by Mr. John H. Noyes deserves 
mention. The community was started in Vermont, but 
soon moved to Oneida, New York, where it existed under 
a communistic plan, until 1879, when its members aban- 
doned communism and organized as a joint-stock company 
under the name of the Oneida Community. 

Another communistic experiment that attracted wide 
attention was organized by Mr. Robert Owen at New 
Harmony, Indiana. Owen came to this country from 
England in 1822. He had wealth, enthusiasm, and ability. 
If communism were ever to succeed this was its oppor- 
tunity. It failed after two years. 

Socialism. — Socialism and anarchism have little in com- 
mon. The socialist would increase authority, while the 
anarchist would abolish it. The anarchist considers 
socialism as "state capitalism," and he is opposed to all 
capitalism. 

There are many forms of socialism, but they all agree 
in certain fundamentals. These are the common owner- 
ship and operation of the chief material means of produc- 
tion. Under a socialistic state most persons would be 
employed by the government, would be paid wages, not 
necessarily equal, and could spend them as they wished, ex- 
cept that they could not estabHsh factories or other agen- 
cies for the production of wealth. Most socialists would 
not object to such small matters as a private person selling 
a part of the products of a garden, selling a few eggs or 
doing odd jobs in his spare time. Some socialists would 
prohibit all private production of utilities, but the ten- 
dency among socialists is to consider small matters as of 
no consequence. Mr. John Spargo, an American socialist, 



PROPOSED RADICAL ECONOMIC CHANGES 319 

describes the program of the most moderate socialists, as 
follows: "The new society must include at least the fol- 
lowing: (i) Ownership of all natural resources, such as 
land, mines, forests, oil-wells, and so on; (2) operation of 
all the means of transportation and communication, other 
than those of purely personal service; (3) operation of all 
industrial production involving large capital and associated 
labor, except when carried on by voluntary, democratic 
co-operation; (4) organization of all labor essential to the 
pubHc service, such as the building of schools, hospitals, 
docks, bridges, sewers, and the like; the construction of 
all the machinery and plants requisite to the social pro- 
duction and distribution, and of aU things necessary for 
the maintenance of those engaged in such public service as 
the national defense, and all who are the wards of the 
State; (5) a monopoly of the monetary and credit func- 
tions, including coinage, mortgaging, and the extension of 
credit to private enterprise. With these economic activi- 
ties undertaken by the State, a pure democracy differing 
vitally from all the class-dominated states of history, pri- 
vate enterprise would by no means be excluded, but limited 
to an extent making the exploitation of public interests and 
needs for private gain impossible." Most socialists ob- 
ject to Spargo's program as leaving too much to private 
initiative. 

Arguments for Socialism Examined. — The method of 
socialists is to attack the present industrial order. They 
claim that "nine- tenths of the wealth of the nation is con- 
trolled by one-tenth of the people" and that every year 
shows a greater concentration of ownership of wealth. 
Such statements have frequently been made, but not 



320 THE ELEMENTS OF ECONOMICS 

proved. The facts, as disclosed by the income-tax returns 
of 1918, are different. The returns of net income show 
that people with incomes of $5,000 or less received 59 per 
cent of the total incomes reported, and those whose in- 
comes were over $5,000 a year received 41 per cent. It 
might therefore seem that though only 10.83 P^^* cent of 
those reporting had incomes of over $5,000 their total 
incomes were 41 per cent of the net incomes reported. 
However, this is not the whole story. The -total net 
incomes reported amounted to less than $16,000,000,- 

000 and this is certainly less than the annual income 
produced by the industries of the United States. The 
difference between the amounts reported and the actual 
product of all industry is explained by the fact that in- 
come taxes were paid by only 4,425,114 persons, or about 

1 in 22 of the population. A large number of people whose 
income was small were exempted from making returns and 
many others made no returns. It is easier for a person of 
small income to escape the income tax than for a person of 
large income. With these facts taken into consideration, 
it is estimated that 89 per cent of the total income goes ta 
those whose incomes are less than $5,000. This does not 
show a great concentration in the ownership of wealth. 
So far as the laboring classes are concerned, wages both 
as measured in money and in purchasing power have 
steadily increased in the last 40 years, a fact which the 
socialists cannot deny. 

The socialists also claim that labor does not get the full 
product of its toil but is the victim of exploitation. For 
example, if a laborer produces with the aid of a machine 
artides which sell for $500 and the laborer receives in 



PROPOSED RADICAL ECONOMIC CHANGES 321 

wages $300 the socialists say he rs robbed of $200. The 
owner of the machine, they say, should be the people. 
This does not prove that the laborer would himself receive 
more under socialism, and he might get less. The socialist 
forgtits that saving was necessary to produce the machine, 
that the inventor and maker of the machine are entitled 
to their rewards, and that the manager of the industry and 
many others must haVe some consideration. Moreover, if 
a dozen men are working to produce one article, who can 
tell what part of the value of the article is produced by any 
one man? SociaHsts talk about distributive justice, but 
fail to agree among themselves as to what is justice. 

Another criticism of the present industrial order is con- 
cerned with the evils of competition. Under the com- 
petitive system there is much waste. For example, a half 
dozen milk wagons go over a route which might be served 
by one. Competition has more serious evils than waste. 
It causes men to adulterate food, use child labor, and 
sometimes oppress workmen. The standard of the worst, it 
is alleged, tends to become the standard of all employers. 

There are many faults in the present industrial system, 
but legislation can remedy most of them. Will socialism 
improve matters? Some industries might be organized 
under the socialistic plan, but not the most important of 
all American industries, that of farming. The competi- 
tive system gives an incentive to the farmer to rise early 
and work late and he does not consider himself a victim of 
exploitation. Would socialism furnish an incentive equal 
to self-interest? Most people think not. His income 
would not depend upon his own work. His work being 
isolated could not be supervised unless there should be an 



322 THE ELEMENTS OF ECONOMICS 

inspector for each farm and a corps of inspectors for the 
inspectors. The endeavor to socialize the farms of Russia 
failed. There is every reason to suppose that such at- 
tempts will always fail. 

A favorite argument of the socialist is that under the 
present industrial regime many people have no chance. 
Wealth and poverty depend upon the accident of birth. 
Some start life with great advantages; others have little or 
no chance of success. There is truth in this statement, 
but less truth than ever before. Child labor is being abol- 
ished, parks and playgrounds give a better life for the 
young, tenement-house reform has done much to benefit 
housing conditions, intoxicating liquors will soon be unob- 
tainable for beverage purposes, every child can now obtain 
an education, and almost every boy or girl -vho really so 
wishes may obtain a college education. Socialists picture 
the socialistic state in too bright colors and see only the 
gloom in the present. America is still the land of oppor- 
tunity and was never more so than to-day. 

Summary. — In this chapter we have examined three 
radical programs for economic changes. Henry George 
was not a socialist. He believed in the present indus- 
trial system, but thought it needed the single tax to make 
it perfect. His chief arguments are: (i) Rent is an un- 
earned income; (2) taxing land to its full rental value 
would prevent withholding land from use for speculative 
purposes; (3) by abolishing all other taxes industry would 
be promoted. We have seen that rent is not the only 
"unearned increment" and hence it would be unfair to 
take all of the rent of land and not tax other unearned 
incomes. Moreover, much of the value of rural land has 



PROPOSED RADICAL ECONOMIC CHANGES 323 

been made by labor and is earned. The single tax would 
abolish desirable taxes. It would also be inelastic. 

Anarchism is a radical theory based upon the belief 
that all exercise of authority by one person over another 
is evil. It is a philosophy of extreme individualism. Com- 
pulsion is necessary in order to preserve order and to pro- 
tect the weak from the strong and the honest from the 
dishonest. Anarchism would produce a reign of terror, 
unless all men were perfect. 

The communists advocate the common ownership of 
most goods and equal distribution of the proceeds of 
industry. The fatal defect of communism is that it gives 
no incentive to the more capable and the more industrious 
members of society. It also fails to recognize that men 
like to have property which is their own. 

Socialists desire the common ownership and operation 
of factories, railroads, stores, and other means of producing 
wealth. The socialists would permit private property in 
most goods for personal use. The claim of socialists that 
"the rich are growing richer and the poor are growing 
poorer" is proved false by the income-tax returns. The 
sociaHsts claim that the present industrial system is evil, 
but they fail to see that there is much good in it. The 
evil may be eliminated to a great extent. The sociaHsts 
do not agree upon what is distributive justice. Some 
industries might be socialized, but not farming. The 
socialists are too pessimistic in regard to the possibilities 
of the present order and too optimistic in regard to 
socialism. 



324 THE ELEMENTS OF ECONOMICS 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. What land in your city has risen in value during the last ten 

years? What land has fallen in value? What caused the 
changes in value? 

2. Give the history of some communistic experiment in America. 

3. Compare socialism and anarchy. 

4. What do you consider the strongest point in favor of socialism ? 

Why? What do you consider its weakest point? Why? 

5. Is our industrial system chiefly good with a few bad spots or 

. chiefly bad with a few good spots? Name some of the bad 
and some of the good features. 

6. What unearned increments, other than land values, exist in the 

United States? 



CHAPTER XXXI 
PUBLIC FINANCE 

Public and Private Finance Compared. — Public finance 
is that branch of economics which deals with the income 
and expenses of government. Public finance differs from 
private finance in three important particulars: (i) The 
income of a government should be so arranged as to meet 
its necessary expenses. Individuals should arrange their 
expenses to fall within their income; (2) a surplus for a 
government is not desirable — it indicates that more has 
been taken from the pockets of the people than was neces- 
sary for the needs of the government and invites legis- 
lative bodies to make reckless expenditures; (3) public 
finance rests upon the power of compulsion. A state may 
compel the people to contribute to its support. 

The Budget. — ^A budget is a statement of probable 
revenue and expenditure and of financial proposals for the 
coming year. It is usual to speak of a budget submitted 
to a legislative body as a tentative budget; when it has 
been adopted it becomes the budget. The advantages of 
a budget for a government are similar to those for a family. 
Expenditures are fixed in relation to one another and a 
limitation is placed upon them. 

Growth in Public Expenses. — Expenses of local, state, 
and national governments have increased vastly in the last 
quarter of a century. This increase is due both to in- 

325 



326 THE ELEMENTS OF ECONOMICS 

creased wealth and the additional duties which govern- 
ments have assumed. The growth of expenditures for 
schools is an illustration. At first the people were content 
with primary education at public expense. Then were 
added the upper grades and the high schools. Now there 
are municipal colleges and universities, and most states 
support great public universities. Free text-books, better 
school buildings, and higher salaries for teachers have in- 
creased expenses, but the results have justified the expense. 
Similar increases in the expense for the preservation of 
order, protection against fire, guarding the public health, 
providing* for the poor, and other necessary duties of 
government might be cited. 

The expense of state governments has not increased so 
rapidly as that of local governments, but the increase has 
been considerable. The growth of state expenses has been 
in part due to the supervision which states have under- 
taken, usually by means of commissions, in looking after 
the- interest of the people in banking, insurance, railroads, 
and other public utilities. State penal and charitable 
institutions have become increasingly efficient and increas- 
ingly expensive. With the coming of automobiles road- 
building has become a state function. The expenses of 
the national government have increased, both through 
doing its former work better and assuming new duties. 
The largest item in the budgets of all the great nations is 
in paying the expenses of past wars and providing for 
possible future wars. Unless the nations of the world can 
agree to settle their differences by some other method than 
war, expense for national defense will continue to increase. 

The following table shows the expense of the United 



PUBLIC FINANCE 



327 



States for the army and navy during the years immediately 
before the World War. 



Year 


Army 


Navy 


Total 


1895 

igo6 


$54,500,000 

117,900,000 

94,300,000 


$31,700,000 
110,500,000 
140,700,000 


$86,200,000 
228,400,000 
243,000,000 


IQI4. 





The cost of and preparation for wars constitute the great- 
est expense of all national governments, because included in 
the expense for wars must be included interest on the war 
debt, pensions for soldiers, and provision for paying the 
debt. The net cost of the World War to the United States 
was fixed by Secretary Houston at $24,010,000,000. 

Public Revenue. — Public income is obtained from a 
variety of sources. In his Science of Finance, Professor 
Henry C. Adams gives the following classification of public 
revenue : 



Direct revenue 



Derivative 

revenue 

Anticipatory 
revenue 



Public domains. 

Public industries. 

Gratuities or gifts, or treasure-trove. 

Confiscations and indemnities. 

Taxes. 
Fees. 

Assessments. 
Fines and penalties. 

Sale of bonds or other forms of credit. 
Treasury notes. 



Public domains were once an important source of revenue 
and many foreign governments now derive revenue from 
forests, mines, and agricultural lands. The United States 



328 THE ELEMENTS OF ECONOMICS 

has disposed of most of its old domains to settlers, but 
recently it has acquired large forest preserves, as have 
some of the states, and these will at some time in the future 
bring some revenue to the treasury. PubHc industries 
such as water-works, lighting plants, postal service, street 
railroads, and steam railroads bring substantial revenues to 
many foreign governments, but in the United States most 
of these services are performed by private corporations or 
are operated not for revenue but for service to the people. 
Special assessments are often levied upon land adjoining a 
projected improvement for the purpose of paying for all 
or a part of the improvement. This is reasonable and 
proper, as the adjoining property will increase in value as 
a result of the improvement. Part of the expense for 
parks, opening new streets, constructing sewers, and like 
improvements is often met in this way. For extraordinary 
expenses or for anticipating the receipt of taxes, public 
loans are extensively used by local, state, and national 
governments. However, taxation is by far the most im- 
portant source of revenue. A tax may be defined as a 
compulsory payment to the government for general public 
purposes. 

Adam Smith's Canons of Taxation. — In his celebrated 
work. The Wealth of Nations, Adam Smith gave four 
canons of taxation which have gained general approval. 
*'The subjects of every State ought to contribute towards 
the support of the government, as nearly as possible, in 
proportion to their respective abilities; that is, in propor- 
tion to the revenue which they respectively enjoy under 
the protection of the State." This canon of taxation, once 
invoked in behalf of proportional taxation is now held to 



PUBLIC FINANCE 329 

justify progressive taxation. Proportional taxation is taxa- 
tion at a fixed rate no matter how large the property may 
be, while progressive taxation requires a rate increasing 
with the amount of property. For example, to tax all 
incomes at 4 per cent would be proportional taxation, but 
to tax incomes of between $2,000 and $4,000 at 4 per cent 
and incomes of between $4,000 and $6,000 at 5 per cent 
and incomes of over $6,000 at 8 per cent would be pro- 
gressive taxation. The justification of progressive taxa- 
tion is that the burden of a tax of 4 per cent on $2,000 is as 
great as the burden of a tax of 8 per cent upon $7,000, in 
the former case $1,920 would remain after paying the tax, 
and in the latter case $6,440. The marginal utility of 
$80 to the average man having an income of $2,000 is as 
great as the marginal utility of $560 to the average man 
having an income of $7,000. 

The second of Adam Smith's canons is self-explanatory. 
''The tax which each individual is bound to pay ought to 
be certain, and not arbitrary. The time of payment, the 
quantity to be paid, ought all to be clear and plain to the 
contributor and to every other person." 

The third canon is that ''every tax ought to be levied 
at the time, or in the manner in which it is most likely to 
be eonvenient for the contributor to pay it." For exam- 
ple, farmers would find November a convenient time as 
the crops are sold by that time. Convenience sometimes 
would be better secured by having taxes payable in two in- 
stalments, in May and November, than to have the entire 
amount payable in one instalment. 

The fourth canon of taxation states in substance that a 
tax which costs much to collect is a poor tax. "Every 



330 THE ELEMENTS OF ECONOMICS 

tax ought to be so contrived as to both take out and keep 
out of the pockets of the people as Uttle as possible over 
and above what it brings into the public treasury of the 
State." 

Direct and Indirect Taxation. — ^A direct tax is one which 
is levied upon the person who must finally pay it. Income 
taxes, poll taxes, taxes on land, and inheritance taxes, are 
examples of direct taxes. An indirect tax is one that is 
shifted from the person who first pays it to another. Cus- 
toms duties, and taxes on articles produced within a coun- 
try are examples of indirect taxes. 

Direct taxes have advantages over indirect taxes. In- 
direct taxation seldom places the burden of a tax upon the 
people in proportion to their ability to bear it. For 
example, a tax upon sugar would be shifted to the final 
consumer and as people do not consume sugar in propor- 
tion to their wealth such a tax would be a greater burden 
upon the poor than upon the wealthy. 

There is also a political objection to indirect taxation. 
It is a well-known fact that people are more interested in 
good government if they pay direct taxes. They may pay 
more in indirect taxes, but they do not know it. Paying 
taxes is a patriotic duty. 

A third disadvantage of indirect taxation is that taxes 
of this sort are inelastic. The amount raised by indirect 
taxes cannot easily be changed from year to year. In- 
creasing the tax may so reduce consumption as to cause 
the returns from the tax to grow less. 

However, indirect taxes have some advantages. They 
enable people to pay taxes in small amounts, as a few 
cents are paid when buying tobacco, clothing, and other 



PUBLIC FINANCE 331 

articles. Indirect taxation is employed by every national 
government. 

Taxes on Imports. — Until the adoption of the income 
tax, the customs duties were the largest items in the 
regular income of the United States. The revenue from 
customs in 1910 was $333,683,445 and the internal revenue 
was $289,957,220. In 1920 the customs duties gave a 
revenue of $332,902,650 and the income and profits 
yielded $3,944,949,288. There are three kinds of customs 
duties: 

1. Specific duties. These are assessed on a unit of 
measure such as a pound, a yard, or a gallon. Specific 
duties may result in taxing articles of low value as high 
as those of large value. For example, if there is a tax of 
fifty cents on a yard of silk, it is a tax of 100 per cent on a 
yard worth fifty cents and a tax of 25 per cent on a yard 
worth two dollars. Specific duties are used to a limited 
extent by the United States. 

2. Ad Valorem Duties. These duties are levied on the 
value of imported articles. Under this plan there is a 
great temptation to undervalue goods and the collectors 
must be men of ability and integrity. The United States 
extensively uses ad valorem duties. 

3. Combination Duties. In the United States there is 
frequently a combination of specific and ad valorem duties. 
For example, under the tariff law of 19 14 there is a duty of 
30 per cent ad valorem and a specific duty of five cents a 
pound on dyes. 

Excise Taxes. — Taxes levied upon articles produced 
within the country are excise taxes. The first excise tax 
was levied in 1791 upon distilled spirits as a part of the 



332 THE ELEMENTS OF ECONOMICS 

plan of Congress for paying the national debt. The tax 
was unpopular and was soon repealed. The War of 1812 
caused excise taxes to be levied upon sugar and distilled 
spirits, but these taxes were repealed in 181 7. The Civil 
War caused excise taxes to be revived on an enormous 
scale. The words of Sydney Smith, employed forty years 
before, have been aptly applied to the excise taxes of the 
Civil War period. 

"Taxes upon every article which enters into the mouth, 
or covers the back, or is placed under the foot; taxes upon 
everything that is pleasant to see, hear, feel, smell, or taste; 
taxes upon warmth, light, and locomotion; taxes on every- 
thing on earth, and the waters under the earth; on every- 
thing that comes from abroad, or is grown at home; taxes 
on raw material; taxes on every fresh value that is added 
to it by the industry of man; taxes on the sauce which 
pampers man's appetite, and the drug, which restores him 
to health; on the ermine which decorates the judge, and 
the rope which hangs the criminal; on the poor man's salt 
and the rich man's spice; on the brass nails of the cofhn 
and the ribands of the bride." 

Most of the excise taxes were abolished after the war, 
but the taxes on liquors and tobacco were retained and 
became an important item of Federal income. The 
Spanish-American War resulted in new excise taxes, which 
were abandoned soon after the war ended; and again at 
the entrance of the United States into the World War, 
excise taxation was revived on a large scale. 

Income Taxes. — The first experience of the United States 
with income taxes came during the Civil War. The In- 
come Tax of 1862 exempted incomes below $600 and taxed 



PUBLIC FINANCE 333 

those in excess of $600 at 3 per cent. Incomes exceeding 
$10,000 were taxable at 5 per cent. In 1864 the income 
tax law was revised and the new rates were 5 per cent on 
incomes between $600 and $5,000, with 7^2 per cent on 
the excess of $5,000 up to $10,000, and 10 per cent on the 
excess over $10,000. The tax yielded $72,982,000 in 1866, 
but after that time a change in the law exempted incomes 
of less than $2,000 and lowered the rate. The tax was 
abolished in 1872. The necessity of providing additional 
revenue caused Congress to institute another income tax 
in 1894. Before the tax was collected the act creating it 
was declared unconstitutional by the Supreme Court. An 
income tax is regarded by most economists as the fairest 
of all taxes, because the amount of 'a man's income is the 
best indication of his ability to contribute to the expenses 
of the government. 

The Constitution of the United States required that all 
direct taxes be apportioned among the states in proportion 
to their population. Since the abihty to pay income taxes 
is not in proportion to the population of the states, no in- 
come tax could be passed by Congress which would be fair. 
Therefore the Constitution must be amended if the United 
States were to use this best source of revenue. After long 
consideration Congress submitted an amendment providing 
that 'Xongress shall have power to lay and collect taxes 
on incomes, from whatever sources derived without appor- 
tionment among the several states, and without regard to 
any census or enumeration." This amendment was duly 
ratified and was proclaimed a part of the Constitution on 
February 25, 19 13. It was fortunate for the country that 
the income tax was in operation before the United States, 



334 THE ELEMENTS OF ECONOMICS 

entered the World War, as it became the chief source of 
income from taxation during the war. 

The Revenue Act of 1918 exempts from the income tax 
unmarried persons with an income of $1,000 or less, and 
married persons, living with husbands or wives, having an 
income of $2,000 or less. There is an additional exemption 
of $200 for each child under eighteen years of age and an 
equal exemption for each dependent of over eighteen years 
of age, who is mentally or physically incapable of earning a 
living. The normal tax is 4 per cent on net incomes of 
$4,000 or less and 8 per cent on incomes in excess of 
$4,000. In addition to the normal tax there are surtaxes, 
the first surtax being i per cent on the amount by which 
the net income exceeds $5,000 and does not exceed $6,000. 
The surtax increases with the amount of income and 
reaches 64 per cent on all incomes between $500,000 and 
$1,000,000. Beyond $1,000,000 income the surtax is 65 
per cent. Practically the same taxation applies to in- 
comes of corporations as to individuals. 

Inheritance Taxes. — Since 1916 the United States has 
had an inheritance tax. It is imposed on the estate as a 
whole, not on the shares of the heirs, irrespective of the 
relationship of the beneficiaries to the decedent. Amounts 
of less than $50,000 are exempt from the tax. Estates 
between $50,000 and $150,000 are taxed at i per cent and 
the rate increases until it reaches 25 per cent on estates 
exceeding $10,000,000. Most of the states have inheri- 
tance taxes also, with exemptions much less than those 
allowed by the United States. 

Taxes on Real Estate. — Taxes on land and buildings 
are employed by state and local governments, but not by 



PUBLIC FINANCE 335 

the Federal Government. Real estate has always been a 
favorite subject for taxation, as it cannot be concealed. A 
difficulty arises because of the fact that the same assess- 
ment is used as the basis for both state and local taxation. 
Each local assessor endeavors to keep down the valuation 
of property in his district in order that it may pay a small 
state tax. It makes no difference in regard to the amount 
•of the local tax whether the property is assessed at its full 
value or at half its value, as the rate is increased as the 
valuation drops, but it does make much difference in the 
amount paid in the state tax. Local assessors of one 
district compete with those of other districts in reducing 
valuations. To remedy inequalities between districts 
many states have state boards of equahzation, but the 
task is beyond the ability of any board. A man who 
knows the value of real estate in a city, seldom knows the 
value of farm land or of land in a city or town in a distant 
part of the state. Economists generally agree that real 
estate should be taxed only for local purposes. 

Taxes on Personal Property. — Personal property con- 
sists of a variety of movable goods, such as clothing, jew- 
elry, books, household furniture, money, stocks, bonds, and 
mortgages. Most personal property is easily concealed 
and much of it cannot be valued correctly by tax assessors. 
In many of the states personal property is valued by its 
owners for taxation purposes and they are obliged to swe^r 
to the correctness of their valuations. The dishonest can 
easily escape a general tax on personal property. Such a 
tax is, therefore, often called a tax on honesty. It is evi- 
dent that states which still retain the general tax on per- 
sonal property should abolish it retaining only a tax upon 



S3^ THE ELEMENTS OF ECONOMICS 

such personal property as cannot be concealed and can be 
valued fairly well by tax assessors. 

A Program of Taxation. — The needs of the Federal 
Government, as soon as conditions become normal, may be 
met by the proceeds of the customs duties, excise taxes, 
an inheritance tax, and an income tax. 

The National Tax Association, at its convention at 
Chicago in 1919, presented A Model System of State and 
Local Taxation. With the exception of an income tax 
which is recommended for states, though also used by 
the United States, there is no overlapping with Federal 
taxation. Doctor Carl C. Plehn, in his Introduction to 
Public Finance J gives a summary of the recommendations, 
as follows: 

"i. A personal income tax. 'Every person having tax- 
able ability should pay a direct tax to the government 
under which he is domiciled.' 'The tax should be levied 
upon persons in respect of their entire net incomes, and 
should be collected only from persons and at places where 
they are domiciled. It should not be collected from busi- 
ness concerns, either incorporated or unincorporated, since 
such action would defeat the very purpose of the tax.' 
Non-residents earning income in or receiving income from 
sources in a State should not be taxed. 

'' ' 2. There should be a tax upon tangible property 
levied exclusively at the place where such property is 
located ' and ' intangible property of all descriptions be ex- 
empt from taxation as property.' The tax-paying ability 
of such property can be reached in other ways. 

''3. That the methods of taxation applied to public 
service corporations be improved so as to impose an equi- 



PUBLIC FINANCE 337 

table burden upon such companies, but no one method was 
recommended. 

"4. A business tax levied upon the net income derived 
Irom business carried on within the State levying the tax.' 

"5. Improved administration involving (a) assessment 
districts large enough to justify the employment of a per- 
manent full time oihcial; (b) sl term of office long enough 
to develop efficiency, at least four years; (c) power of re- 
mcJval of assessors by the State tax commission; (d) a per- 
manent central State tax commission, with broad powers 
over the entire tax system, State and local." 

Exemptions from Taxation. — Churches, charitable in- 
stitutions, schools and colleges not operated for private 
gain, literary societies, volunteer fire departments and 
other associations which are operated for the public wel- 
fare, are exempt from taxation. Incomes below a fixed 
minimum, property of less than a few hundred dollars, and 
tools of mechanics are exempted from taxation in many 
states. These exemptions are reasonable and have aroused 
little opposition. The exemption of public property and 
bonds of national, state, and local units is also reasonable. 
At the present time salaries paid by the states and local 
governments are exempt from the Federal income tax. It 
does not seem equitable that a public school-teacher should 
pay no income tax, while a teacher in a private school or 
college should be taxed, but Federal taxation of state 
employees is regarded as unconstitutional. Bonds of pub- 
lic-service corporations are sometimes exempt from state 
taxes. Exemption of any person or of property from tax- 
ation means that other persons must pay larger taxes. 
Exemptions should be allowed only when the pubHc wel- 



338 THE ELEMENTS OF ECONOMICS 

fare demands them. It is the privilege and duty of citizens 
to contribute to the public financial needs. 

Taxes on Sales. — ^A tax on sales has been proposed as a 
substitute for the excess-profits tax, the tax on amusements, 
and on so-called luxuries. The plan is to place a tax of 
I per cent upon all taxable sales above a total of $6,000 
made by any dealer. This tax would, of course, be shifted 
to the consumer, and if the article changed hands several 
times before reaching the final consumer, it would increase 
with every exchange. In the great majority of cases the 
increase probably would not be over 3 per cent. The 
arguments in favor of a tax on sales are: 

1. It would produce a large revenue — at least $2,000,- 
000,000 a year. 

2. It would be paid by the whole body of the people, 
but in small amounts by each individual. 

3. It would be simple in operation, would yield a 
steady flow of income, and could be collected without 
much expense. 

4. It is claimed that it would reduce the cost of living. 
The excess-profits tax is now shifted on the consumer and 
this burden is probably greater than would be the burden 
of a sales tax. , 

The chief objection to a sales tax is that it violates the 
canon of taxation of Adam Smith that says ^'sl tax ought 
to bear upon people in proportion to their ability to pay." 
The poor would pay more in proportion to their ability 
than the rich. This objection would not hold, however, in 
case the income tax were retained, with its exemption of 
incomes below $1,000 for unmarried persons and $2,000 for 
married persons. A i-per-cent tax on sales was imposed 




Reproduced by permission qf J. N. Darling and N. Y. Tribune, Inc. Copyright 1921. 

IT'S JUST AS WELL TO REMEMBER WHOM WE'RE GETTING 

DINNER FOR 

Payment for past wars and preparations for possible wars absorb over 80 per 
cent of the revenue of the United States. The financial argument for disarma- 
ment by the great nations is unanswerable. 



340 THE ELEMENTS OF ECONOMICS 

in the Philippine Islands in 1905 and it is reported to have 
given general satisfaction. 

Public Debts. — The ordinary expenses of government 
should be paid out of the regular revenues, but there are 
times when public borrowing properly may be employed. 
The expenses incident to the building of a great public im- 
provement, like the Catskill Aqueduct, or the Panama 
Canal, may be met out of the proceeds of a loan, which can 
be repaid through annual payments into a sinking fund 
which will equal the amount borrowed at the time the 
bonds become due. No great public improvements could 
be made if all of the payment for them had to come out of 
taxes raised during the years when the work of construc- 
tion was being done. In a similar way the borrowing of 
money to finance a war is justified. The war, like a great 
public improvement, may be for the welfare of future 
generations and part of the burden should be borne by 
them. 

In a certain sense the present generation must pay for 
all its expenses. The labor of building the Panama Canal, 
the stone, cement, and tools used had to be furnished when 
the canal was being built, and so the labor, the munitions 
of war, the clothing and food of the soldiers had to be 
supplied by the people living when the war was being 
fought. But the money to buy supplies and pay men 
can be borrowed or raised by taxation. If paid entirely 
out of the proceeds of taxation, it will raise taxation to 
such an extent as to discourage industry and weaken the 
/'home front." If a part of the expense is paid by bor- 
rowing, that part is advanced by those who subscribe to 
the bonds and they are repaid later out of the proceeds of 




From a photograph by Brown Brothers. 

SELLING LIBERTY BONDS IN NEW YORK 

The building on the right is the Sub-Treasury. It occupies the site of Federal 
Hall, where Washington was inaugurated first President of the United States, 
April 30, 1789. The statue of Washington may be seen in front of the Sub-Trea- 
sury. The narrow street in the background is Wall Street, the financial centre of 
America. At the head of Wall Street is Trinity Church on Broadway, facing the 
entrance to Wall Street. 



342 THE ELEMENTS OF ECONOMICS 

taxation. No belligerent in the World War could have 
paid its expenses out of the proceeds of taxation without 
arousing serious discontent. 

The Liberty and Victory Loans. — ^Approximately one- 
third of the expenses of the United States during the war 
was obtained out of the proceeds of taxation, the re- 
mainder was raised through loans. The total increase in 
the public debt of the United States during the war was 
as follows: 



First Liberty Loan $1,985,000,000 

Second Liberty Loan. 3,526,000,000 

Third Liberty Loan 3.904,000,000 

Fourth Liberty Loan 6,614,000,000 

Victory Loan. 4,414,000,000 

Treasury Certificates 3,736,000,000 

War Savings Certificates 911,000,000 



At the time the war began the total debt of the United 
States was only $1,120,000,000. The Liberty and Victory 
loans were a great success, notwithstanding that thousands 
bought bonds they could not afford to hold and later by 
throwing them upon the market lowered the market price 
of bonds. The price was also depressed by the fact that 
first-class bonds of private corporations were paying a much 
larger rate of interest. None the less, thousands of peoplp 
who never before had owned a bond, purchased bonds of 
the United States and continue to hold them. They not 
only secured the best bonds in the world and learned a 
lesson in saving, but their bonds will become more valu- 
able as time passes. No one who buys and keeps bonds 
of the United States will ever have reason to regret his 
investment. 



PUBLIC FINANCE 343 

Summary. — Public and private finance differ in three 
important particulars: (i) Public revenue is designed to 
equal public expenses; (2) a surplus is not desirable for a 
state; (3) pubKc finance rests upon the power of compul- 
sion. PubKc expenses are growing. Taxes may not be 
expected to fall, but we should see that the government 
gets full values for the money it spends. The cost of war 
has been very great. This can, and should, be lessened 
through international agreements. 

The greatest regular source of public revenue is taxa- 
tion. Adam Smith's four canons of taxation are generally 
accepted as describing rules to which taxation should con- 
form. Direct taxes are taxes which are finally paid by 
the person upon whom they are originally levied. In- 
direct taxes are shifted. Direct taxation is superior to 
indirect taxation in most respects, but indirect taxation 
has the advantage of being paid in small instalments by 
the persons upon whom the burden finally falls. Taxes 
on imports may be specific, ad valorem, or a combination 
of the two. Excise taxes are taxes laid upon articles pro- 
duced within the country. Taxes on incomes have become 
the most important tax in the United States. These taxes 
are the fairest of all taxes. Inheritance taxes are em- 
ployed by both state and national governments. The 
income from inheritance tax differs from year to year, but 
the average for a term of years remains the same. Taxes 
on real estate should be for local purposes. The personal- 
property tax should be abolished because it cannot be 
properly collected. 

Exemptions from taxation is proper when the public 
welfare demands it. PubHc debts may properly be con- 



344 THE ELEMENTS OF ECONOMICS 

tracted for extraordinary expenses. Regular expenses 
should be met out of regular sources of income. 

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS 

1. Get a copy of the budget of your city for the last year. What 

are the principal items of expense? What changes would 
you suggest? 

2. Should a new park be purchased by a tax on the entire city? 

By a tax on adjoining property? By a combination of the 
above ? By the sale of city bonds ? 

3. What direct taxes do you pay? What indirect taxes? What 

direct taxes does a day-laborer pay ? What indirect taxes ? 

4. Should a man who has no children be taxed to support the 

public schools? Why? Why should churches be exempt 
from taxation? What schools pay taxes? Why? 

5. Why are Liberty and Victory Bonds the best securities in the 

world? Why did some of them fall below par? Find the 
present price of each issue of Liberty and Victory Bonds and 
explain the difference in their market values. 



CHAPTER XXXII 
SOCIAL AND ECONOMIC BETTERMENT 

The word ''Utopia" was introduced into the English 
language in 1516, when Thomas More published his book 
bearing that title. Utopia means the land of nowhere. It 
describes an ideal commonwealth very different from the 
England of the sixteenth century. England seemed to 
exist only for the benefit of the rich and powerful. Good 
food and decent clothing were too expensive for the poor. 
Tillage had decreased and pastures for the sheep of the 
rich abbots had supplanted arable land. Disabled soldiers 
crippled in useless wars were everywhere to be seen. The 
courts of the rich were thronged with retainers who ren- 
dered no useful service, but gratified their lord's love of 
ostentation. If a man chose to steal rather than starve, 
he paid the penalty with his life. Frequently a score of 
victims might be seen hanging from one gallows. 

In contrast to the England of his day More pictured the 
land of nowhere, a country where everything was perfect. 
In Utopia the people elected their own king and parlia- 
ment. The Utopians hated war and never engaged in a 
war of conquest. Education was not confined to one class, 
but every one was taught to read and Write. In Utopia 
every family had a vote and voting was by ballot. All 
property belonged to the nation. 

345 



346 THE ELEMENTS OF ECONOMICS 

This was Sir Thomas More's idea of a perfect common- 
wealth and it seemed unattainable in any particular. Yet 
we have arrived at Utopia with the exception of com- 
miunism. The dream has come true. 

Recent Social and Economic Progress 

Most of the progress since the days of Sir Thomas has 
been made in the last one hundred and twenty-five years. 
In England one hundred years ago, the hours of labor 
were from twelve to sixteen a day. Wages were so low 
that every member of a family had to work and the com- 
bined wages were scarcely enough to afford a decent liv- 
ing. Women were employed in the mines, frequently har- 
nessed to coal carts like beasts of burden. These carts 
were dragged through low and narrow passages, where the 
women had to stoop and crawl on their knees. Child labor 
was the rule. Pauper children were apprenticed to masters, 
who put them to work in factories. If a child attempted 
to escape he was chained to the machine which he oper- 
ated. Labor organizations were illegal and the working 
men had no votes. The criminal law showed the cruelty 
of the time. Two hundred and fifty crimes were punish- 
able by death. Even the stealing of goods to the value 
of five shillings was a capital offense. There was no popu- 
lar education. 

In America conditions were better, but hours of labor 
were long and slavery degraded labor. Had any one in the 
days of George Washington attempted to predict economic 
and social conditions as they exist in the twentieth century 
he would have been thought a dreamer. 

Were men content with the standard of living which 



SOCIAL AND ECONOMIC BETTERMENT 347 

prevailed a hundred years ago, a few hours' labor each day 
would produce all the goods needed. The rich had many 
servants and many costly ornaments, but they lacked the 
comforts of a modern working man. Joseph Priestley 
wrote that his mother, some time in the year 1 740, required 
him to return a pin which he found at his uncle's house. 
She did this to give him "a, clear idea of the distinction of 
property." Pins were not so abundant that one was re- 
garded with indifference. Even so late as 1840 thorns 
were sometimes used for pins in parts of the United States. 

Methods or Economic Progress 

There is no reason to doubt that economic progress will 
be as great in the future as it has been in the past. A 
larger production of wealth will give more comforts to the 
people and more time for education and recreation. A 
larger production of wealth may be secured: 

1. By increasing the supply of available land. Drain- 
age of swamps, irrigation of arid lands, and opening means 
of communication with lands now unavailable because of 
distance are among the means of increasing available land. 
Much of the land of North America is now unavailable 
and much more than half of the land of South America is 
at present unavailable. 

2. By utilizing more fully the forces of nature. The 
power of the winds, the water-power afforded by rivers^ 
the force of the tides are as yet almost neglected. 

3. By increasing capital. This may be done by en- 
couraging savings, by economy in the use of materials, by 
new inventions, and by making investments safe and there- 
fore more attractive. 



348 THE ELEMENTS OF ECONOMICS 

4. By education in the arts and sciences, thus increas- 
ing the efficiency of both labor and capital. 

5. By teaching the dignity of labor and the vice of idleness. 

Increased Production should Benefit All 

Every useful member of society should share in the 
benefits of an increased production of wealth. A high 
standard of life for laborers and all others should be en- 
couraged. Immigration of undesirable people of what- 
ever race should be prevented. Building and Loan Asso- 
ciations and other agencies to assist people to own their 
own homes should be encouraged. The housing question 
will never be completely settled until every family owns 
its own home. If there is no room in the city, railroads 
and subways may be constructed to take the people to the 
country, or the factories may move to the country. 

Public art-galleries, museums, libraries, parks, and rec- 
reation centres will give to all increased possibilities of 
education and amusement.. 

Insurance can be made available to protect the people 
against the certainties of death and old age, and against 
the uncertainties of accident, disease, and unemployment. 

Education can be extended so that all who wish and can 
profit by it may have the advantages of higher education. 

Though great progress has been made in the past, it is 
nothing as compared to what the future has in store. 

Sir Thomas More would be amazed if he could see the 
United States in the twentieth century. Perhaps our 
amazement would be as great could we see the United 
States in the twenty-first century. 



APPENDICES 



APPENDIX I 

INDUSTRIAL REPRESENTATION PLAN OF THE FAC- 
TORY OF THE GOODYEAR TIRE AND RUBBER 
COMPANY, AKRON, OHIO * 

The Council of Industrial Relation^, composed of representa- 
tives elected by Goodyear men and women, foremen elected by 
Goodyear foremen, and executives appointed by the Goodyear 
Factory management, after having thoroughly considered the sub- 
ject of industrial representation for securing justice to both men 
and management through co-operative methods, has evolved the 
following plan for industrial co-operation at Goodyear, and presents 
this plan to Goodyearites in the sincere belief that its acceptance 
by management and men of the Goodyear Factory will prove bene- 
ficial to all. 

I. Executive Powers 
All executive powers for operation of the Goodyear Factory shall 
be vested in the management, and shall not be abridged in any 
way except in accordance with the legislative powers granted in 
this Industrial Representation Plan. 

2. Legislative Powers 
All legislative powers granted in this Industrial Representation 
Plan shall be vested in an Industrial Assembly of the Goodyear 
Factory which shall consist of two (2) houses, namely, a Senate 
and a House of Representatives. 

3. The Industrial Assembly 

The Industrial Assembly shall be composed of forty (40) Repre- 
sentatives and twenty (20) Senators, elected by the Industrians of 
the Goodyear Factory, who shall meet separately or jointly, on 

* From The Industrial Republic, by Paul W. Litchfield. Printed by per- 
mission of Houghton Mififlin Company, owners of the copyright. 

" 351 



352 APPENDIX I 

the first Monday in each month in Goodyear Hall. Representa- 
tives shall be elected for one year, and Senators shall be elected for 
two years. 

Each Representative and each Senator shall have one vote. 

Each House shall vote independently of the other. 

Each House shall determine rules for its proceedings and shall 
keep a record of its proceedings. 

4. Unit of Representation — Precinct and District 

The Goodyear Factory shall be divided into forty (40) precincts. 
Precincts shall be determined so as to include substantially an 
equal number of people, and with due regard to departmental 
classification of the factory. 

Each precinct shall have the right to elect one Representative. 

The precincts shall be further arranged into groups of four, and 
each group shall have the right to elect two Senators. 

5. Method of Election and Recall of Senators 
AND Representatives 

Election of Senators and Representatives shall be held in the 
Goodyear Factory annually on the second Monday in October by 
secret ballot, and the Assembly shall be convened on the first 
Monday in November. At each annual election there shall be 
forty Representatives and ten Senators elected, except in the first 
election, when there shall be twenty Senators elected. 

A Representative or Senator may be recalled on petition signed 
by two-thirds of the voters in his precinct or district, and approved 
by two-thirds of the House of which he is a member. 

Upon severance of employment with the Company, a Represen- 
tative or Senator shall immediately and automatically cease to hold 
office. 

6. Qualifications of Representatives and Senators 

No person shall be a Representative who shall not have attained 
to the age of twenty-one years and who shall not be an Industrian 
of Goodyear, and not have had one year's continuous service in the 
factory immediately prior to date of election. 

No person shall be a Senator who shall not have attained to the 
age of twenty-five years, and who shall not be an Industrian of 
Goodyear, and not have been in good standing on the pay-roll of 



APPENDIX I 353 

The Goodyear Tire & Rubber Company for five years, the last two 
of which shall have been a continuous service immediately prior to 
election. 

If vacancies in the seats of Representatives or Senators happen 
by resignation or otherwise, the one who shall have received the 
next highest number of votes from the precinct or district in which 
the vacancy shall have occurred shall fill the vacancy. 

7. Qualifications or Voters and Definition of Industrian 

A Goodyear Industrian must be eighteen years of age, must be an 
American citizen, understand the English language, and have a six 
months' continuous service record in the Goodyear Factory imme- 
diately prior to election. Each Goodyear Industrian is entitled to 
vote. 

8. Power and Procedure of the Industrial Assembly 

The Articles of Incorporation of The Goodyear Tire & Rubber 
Company and the laws of the State of Ohio fix the final authority 
and responsibility for management of the company in its Board of 
Directors. Therefore, subject only to the right of the Board of 
Directors to veto or annul, the power of the Industrial Assembly 
shall have legislative power to make changes in Factory Rules and 
Regulations which from time to time have been or shall be made 
by the management as provided in Article i, on the subject of wag 
adjustments, working conditions, and the adjustment of grievance^ 
in accordance with the following procedure: 

Every bill which shall have passed the House of Representatives 
and the Senate, shall, before it becomes a Factory Rule or Regula- 
tion, be presented to the Goodyear Factory Manager. If he 
approves, he shall sign it, but if not, he shall return it with his 
objections to the House in which it shall have originated, who shall 
enter the objections at large upon their record, and proceed to 
reconsider it. If after such reconsideration, two-thirds of that 
House shall agree to pass the bill it shall be sent, together with 
the objections, to the other House, by which it shall likewise be 
reconsidered, and if approved by two-thirds of that House it shall 
become a Factory Rule or Regulation. But in all such cases the 
votes of both Houses shall be determined ^by yeas and nays, and 
the names of the persons voting for and against the bill shall be 
entered on the record of each House respectively. If any bill shall 
not be returned by the Factory Manager within thirty days (Sun- 



354 APPENDIX I 

days excepted) after it shall have been presented to him, the same 
shall be a Factory Rule or Regulation in like manner as if he had 
signed it, unless the Assembly by failure to provide proper means 
to receive it shall prevent its return, in which case it shall not be a 
Factory Rule or Regulation. 

9. Approval and Veto Powers of the Factory Manager 
Every order, resolution, or vote, to which the concurrence of 
the Senate and House of Representatives may be necessary (except 
on a question of adjournment), shall be presented to the Factory 
Manager of the Goodyear Company, and before the same shall take 
effect shall be approved by him, or being disapproved by him, shaU 
be repassed by two-thirds of the Senate and House of Representa- 
tives according to the rules and limitations in the case of a bill. 

10. Joint Conferences 

On matters of joint interest to men and management, such as 
wage adjustments, working conditions, and the adjustment of 
grievances, joint conferences may be called where representatives 
of the men meet an equal number of representatives of the manage- 
ment. Frequent conferences are desirable for the consideration of 
constructive suggestions of mutual interest. 

II. Joint Conferences — How Formed 

The Industrial Assembly shall appoint six (6) Industrians, three 
from the Senate and three from the House of Representatives, and 
the Factory Management shall appoint six (6) Industrians to meet 
as a joint conference. Persons thus selected shall be duly accred- 
ited representatives of the Goodyear Factory men and manage- 
ment for consideration of and co-operation upon subjects of mutual 
interest. The Industrial Assembly shall maintain standing com- 
mittees composed of three members of each House to facilitate 
quick action in securing a joint conference. 

12. Industrial Representation Plan — How Amended 
The Industrial Assembly, whenever two-thirds of both Houses 
shall deem it necessary, shall propose amendments to this Indus- 
trial Representation Plan, which shall be valid to all intents and 
purposes as a part of this plan when approved by the Factory 
Manager. In case amendments have been passed by a two-thirds 



APPENDIX I 355 

vote of both Houses over the veto of the Factory Manager, such 
amendments must be approved by the Board of Directors of The 
Goodyear Tire & Rubber Company before becoming valid. 

13. Oath of Office 

Before entering upon his duties, each Representative or Senator 
shall take and subscribe to the following oath which shall be ad- 
ministered by any oflScer empowered to administer oaths under 
the laws of Ohio: "I solemnly swear (or affirm) that I will faith- 
fully support the Constitution and laws of the United States and 
the State of Ohio and the Industrial Representation Plan of the 
Goodyear Factory, and that I will to the best of my ability faith- 
fully and conscientiously discharge the duties incumbent on me as 
a Representative (or Senator) under such plan." 

14. Guarantee Against Discrimination 
There shall be no discrimination against any Goodyearite on 
account of membership or non-membership in any labor organiza- 
tion or against any Representative or Senator for action taken by 
him in performance of his duties as outlined in this Plan. 

15. Industrial Representation Plan — How Ratified 

This Industrial Representation Plan shall become effective when 
a majority of the Industrians of the Goodyear Factory and the 
management of the Goodyear Factory shall have authorized the 
present Industrial Relations Council to place their signatures 
hereon . 



APPENDIX II 

Extracts from advance copy of bulletin prepared by Mr. Don D. 
Lescohier, Associate Professor of Economics, in charge of Ameri- 
canization work for the University of Wisconsin. Published by 
the Extension Division of the University of Wisconsin. 

AMERICANIZATION— WHAT IS IT?* 

Americanization in the United States, and Canadianization in 
Canada, differ fundamentally in their spirit, method, and purpose 
from the efforts of Germany to Germanize Poland, Schleswig- 
Holstein, and Alsace-Lorraine; of Austria to Austrianize the Czechs 
and Croats; and of Turkey to suppress the nationaUsm of the Ar- 
menians. The Central Powers tried to crush the national cultures 
and customs of peoples over whom they had acquired power by 
force of arms. They continually subjected them to the efforts of 
conquerors who sought to suppress the language and traditions that 
had obtained in the acquired territories, and to compel the use of 
the language, government, and culture of the conqueror. 

Americanization has nothing in common with such efforts as 
these. It is an effort to assist the alien among us to understand, 
appreciate, and partake of the best in American life and thought. 
It is an effort to provide facilities that will enable him to become 
an integral part of America and its life. It is a movement to help 
him share the privileges and benefits that a democracy offers to its 
people, and to fit him for its responsibilities as a citizen in a demo- 
cratic commonwealth. It aims to help him know our national life; 
to help him make our traditions, heroes, and ideals his; to inspire 
in him a love for America and what it stands for; to win his heart 
to the things we love. 

But Americanization is more than this. It is as necessary for 
Americans to understand the peoples who have come to them from 
foreign lands as for those peoples to become acquainted with 
America. Every people whose feet have pressed our soil has 

* Printed by permission of the author. 
356 



APPENDIX II 357 

brought to us traditions, customs, capacities, ideals, and personal 
qualities which are of inestimable value to America. Each race 
or nationality, when it first came to our shores, had to start at the 
bottom of the economic ladder. Each one's capacity was under- 
valued by the American during the early years of its migration to 
America, because it had to rely principally upon common labor for 
a livelihood while it was learning our language and customs and 
fitting itself into our national life. The indifference and hardly dis- 
guised contempt which a large number of Americans felt toward the 
Italian or the Slav during the twenty-five years from 1890 to the 
outbreak of the war, was experienced in earlier years by the Irish- 
man and, in many parts of the country, by the German, Scandi- 
navian, and Belgian. It is as necessary to help the American 
understand the newcomer and appreciate the contribution which 
he will make to our national life, as to help the immigrant under- 
stand the American. 

There is another point which Americans must be taught to 
remember. Every alien who comes to America comes here because 
he believes that America is a better place to live than his homeland. 
He comes here hopefully, expectantly, eagerly. He comes here in 
a receptive mood. The only reason that alien propaganda has been 
able to retain a hold on part of the immigrants, has been that we 
have failed to provide them with proper educational, industrial, 
and social opportunities to become a real part of our life. They 
have not found us responsive, and their enthusiasm has been chilled. 
They have concluded that we did not care about them. Ameri- 
canization must teach the American to value the people who have 
come to us, and cause him to assist the alien to enter into the 
privileges and duties of America's adopted sons. 

Americanization is, then, a process of education, of mutual under- 
standing, of growing together. It cannot be accomplished by any 
one agency. The pubHc schools can reach some of the adults; 
the Y. M. and Y. W. C. A., the social settlements, the welfare work 
of employers have important parts to play; while the university's 
research work and training of leaders is necessary to provide 
specialized knowledge and leadership. Improvements in labor 
conditions, in land laws, in the housing of the poor, and in methods 
of labor distribution are as important as any of the educational 
work. They will remove many of the immigrant's causes of bitter- 
ness. Community and social centres; women's and civic clubs; 



358 APPENDIX II 

and the aroused interest of churches, parochial schools, fraternal 
orders and companies engaged in land colonization are all essential 
to the case. In a word, Americanization is a process of mental 
and spiritual reconstruction — if we can use the word spiritual in a 
non-religious sense — which must be accomplished by a multitude 
of forces in our national life. The essential thing now is that those 
forces he widely directed so that they may accomplish the needed 
result, rather than produce evil results by their misdirected though 
well-intentioned efforts. 



INDEX 



INDEX 



Acceptances, 213 

Advertising, 20, 164-167 

Agriculture, 120, 126-127; scien- 
tific, 130 

American Federation of Labor, 
294-295 

American Merchant Marine, 156- 

158 
Americanization, 63-64, 356-358 
i\narchism, 316-317 
Anderson, B. M., 204 
Anti-trust laws, 260 
Arbitration, 283-284 

Balance of trade, 229-230 
Bank-notes, 193-197 
Bank reserves, 209-210 
Banking and credit, 206-218 
Banking, deposit function, 207; 

loans and discounts, 207-209 
Banks, kinds of, 210-21 1 
Bills of exchange, 216, 231 
Bimetallism, in United States, 

185-187; international, 188 
Boas, R. P., 297 
Bonds, 89-92; 214 
Book accounts, 213 
Boycotts, 284-285 
Brassage, 183 

Budget, 325; family, 30-34 
Bullock, Charles J., 248 

Canadian Industrial Disputes Act, 

283 
Canals, 148-150 
Capital, 66-70; fixed, 67; freedom 



36] 



of, 13; specialized and free, 68; 
public, 68 

Capital goods, 67 

Carnegie, Andrew, 47 

"Caveat Emptor," 167-168 

Checks, 214; certified, 215 

Child labor, 285-286 

Clayton Act, 261 

Clearing-house, 215-216, 224 

Closed shop, 279-280 

Coal, production in United States^ 
105-106 

Comforts, 28 

Commons, John R., 52 

Communism, 317-318 

Competition, 14; not always per- 
fect, 79 

Complimentary goods, 79 

Consumer, influence upon produc- 
tion, 44-46 

Consumer's goods, 27 

Consumption, 21; economic order 
of, 26; useful and harmful, 22 

Co-operation, 94-95 

Copyrights, 250 

Corn, production in United States, 
120-121 

"Corners," 162-163 

Corporations, 88 

Cost of production, 80-81 

Cotton, production in United 
States, 124 

Credit, 212; uses and abuses, 216— 
217 

Crises, 220-225; rniddlemen and, 
224 



362 



INDEX 



Currency, elastic, 195; effect of 

changes in, 200 
Custom, 16 



Free coinage, 183-184 
Friday, David, 51, 311 
Future goods, 21 



Debts, public, 340-342 
Demand and supply, 74 
Demand, elastic and inelastic, 74 
Diminishing returns, in agricul- 
ture, 127-128; in manufactur- 
ing, 142 
Dividends, insurance, 173-174 
Division of labor, 12; 54-55 
Division of occupations, 55-56 

■"Economic man," 6 

Economics, defined, i; divisions 

of, 5; and other sciences, 4; 

subject matter of, 4 
Edge Act, 234 
Eight-hour day, 287-288 
Ely, R, T., 29 
Engel's law, 31-32 
Entrepreneur, 86; as risk takers, 

306-307 
Entrepreneurs, classes of, 307-308 
Exchange, 12; foreign, 230-234 
Expense, public, 325 
Extravagance, 46-48 

Factory system, 138-139; in Amer- 
ica, 139-140 

Farm products, marketing, 132 

Farms, size of, 132 

Federal Reserve Bank Notes, 196 

Federal Reserve Notes, 197 

Federal Reserve System, 196-197 

Fiat money, 193 

Finance, public, 325-344 

Fire, prevention of, 171; insur- 
ance, 170-171 

Fisher, Irving, 203 

Fishing, 103-104 

Foreign trade, 228 

Forest Service, 116 



George, Henry, 313 
Goods, 20; economic, 21; free, 21 
Goodyear Tire and Rubber Com- 
pany, 95-96, 351-355 
Great Lakes, trade on, 158 
Greenbacks, 191-193 
Gresham's law, 184-185 
Groups, non-competitive, 274, 275 

Hunting, 102-103 

Immigration, 60-62 
Index numbers, 202-203 
Industrial Conference, 96-97 
Industrial democracy, 95-97; 351- 

355 
Industrial depressions, 220-225 
Industrial revolution, 137-138 
Industrial Workers of the World, 

296 
Inheritance, 11 
Insurance, 170-178 
Interest, 300-304 
International trade, 227 
Interstate Commerce Commission, 

152 
Iron ore, production in United 
States, 107 

Kansas Court of Industrial Rela- 
tions, 284 
Knights of Labor, 293-294 

Labor, division of, 52; freedom 
of, 12; organizations, 291-299; 
problems, 279-299 

Land, increase in, 42 ; as property, 
42 

Liberty loans, 342 

Litchfield, Paul, 96 



INDEX 



363 



Loans, long and short time, 302 

Lockouts, 283 

Loyal Legion of Loggers and 

Lumbermen, 296-298 
Lumbering, 110-116 
"Lump of labor fallacy," 142 
Luxuries, 28-30 

Machinery and labor, 141-142 
Malthusian theory, 59-60 
Manufacturing, 137-144 
Marginal producer, 81 
Marginal product, 128-129 
Marketing of farm products, 132- 

133 
Markets, 72-74 
Merchandising, 161-168 
Merchant Marine Act of 1920, 156 
Minimum wage, 35-36 
Mining, 1 04-1 10 
Money, 180-204 
Monopoly, 16; 246-262 
Multiple standard, 201 

National Banking System, 194- 

195 
Nature, 41 
Necessaries, 27 
New York Stock Exchange, 167- 

l68 
Non-producers, 40 

Occupation, division of, 52 
Open shop, 279-280 

Partnerships, 87-88 

Patents, 240 

Personal services, 40 

Petroleum, 107-110 

Plehn, Carl C, 336 

Population, 56-59; urban and 

rural, 130-131 
Prices, limits to regulation of, 256; 

quantity theory of, 200 



Producers' goods, 2"] 

Production on large scale, 140 

Production of wealth, 39-49 

Profit-sharing, 92-93 

Profits, 306-312 

Progress, economic, 347-348 

Promissory notes, 212 

Property, private, 10 

Protection vs. free trade, 237-244 

Public debts, 340-342 

Railroads, 140-154; abuses, 152; 
competition, 150; and Great 
War, 154; regulation of, 152- 

154 
Reclamation Service, 42-44 
Rent, 263-270 
Replacement funds, 69 
Revenue, public, 327 
Risks, business, 307 
Roads, 146-148 

Salesmanship, 114 
Satiety, law of, 24 
Seigniorage, 183 
Selling, high cost of, 163 
Shipping Board, 157 
Single Tax, 313-316 
Smith, Adam, 328-330; 276-277 
Socialism, 318-323 
Society, 3 

Stabilized dollar, 203-204 
Standard Oil Company, 95 
Standard Oil Trust, 259-260 
State, the, in relation to indus- 
try, 97-98 
Stock-raising, 1 19-120 
Stocks, 89-92 
Storage, 162 
Strikes, 281-282 
Substitution, law of, 75 

Tariffs, 237 

Taxation, a program of, 336; 



364 



INDEX 



exemptions from, 337; indirect, 
330 

Taxes, excise, 331-332; on im- 
ports, 331; income, 332-334; 
inheritance, 334; on personal 
property, 335-336 

Thrift, 46 

Timber depletion, Ii2-n6 

Transportation, 146-160 

Trusts, 259-261 

Turnpikes, 146 

Usury, 303 

Utility, 20; form, 39; place, 39; 
time, 39; possession, 40 



Value, market, 75; subjective, 

75-76 
Vested rights, 11 

Wages, 272-278 

Wants, cultural, 19; elementary, 

19 

Water, transportation by, 154-156 

Wealth, consumption of, 5; dis- 
tribution of, 5; public, 22 

Webb-Pomerene Act, 234-235 

Welfare Work, 93-99 

Wheat production in United 
States, 121-122 

Women wage-earners. 286 













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